1 


THE  GENERAL  PRICE  LEVEL  OF  STOCKS,  1890-1918 

BY 

MAX  JUDD  WASSERMAN 

< t 

A.  B.  Cornell  University,  1918 


THESIS 

Submitted  in  Partial  Fulfillment  of  the  Requirements  for  the 

Degree  of 

MASTER  OF  ARTS 
IN  ECONOMICS 

IN 

THE  GRADUATE  SCHOOL 

OF  THE 

UNIVERSITY  OF  ILLINOIS 


1921 


Digitized  by  the  Internet  Archive 
in  2016 


https://archive.org/details/generalpriceleve01wass 


J 

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2 


\fjL 

UNIVERSITY  OF  ILLINOIS 


THE  GRADUATE  SCHOOL 


191 


I HEREBY  RECOMMEND  THAT  THE  THESIS  PREPARED  UNDER  MY 


SUPERVISION  BY. 


Max  Judd  Wasserman 


ENTITLED  The  General  Price  Level  of  Stocks.  1890-1918 


BE  ACCEPTED  AS  FULFILLING  THIS  PART  OF  THE  REQUIREMENTS  FOR 


THE  DEGREE  OF Master  of  Art3  In  Economics 


In  Charge  o^Thesis 


^Head  of  Depai 


Department 


Recommendation  concurred  in* 


Committee 


on 


Final  Examination* 


*Required  for  doctor’s  degree  but  not  for  master’s 


.i~  j o s-i'  o 


TABLE  OF  CONTENTS 


Chapter  I.  Introduction 1 

Chapter  II.  The  General  Price  Level  of  Stocks 

Independently  Considered 7 

Chapter  III.  The  General  Price  Level  of 

Stocks  and  Earnings  and  Dividends 17 

Chapter  IV.  The  General  Price  Level  of  Stocks 

and  the  Monetary  and  Banking  Indices 26 

Chapter  V.  The  General  Price  Level  of  Stocks 

and  Indices  of  the  Condition  of  Business 
Enterprise 48 

Chapter  VI.  Relations  Existing  Between  the  Foreign 
Trade  Group  and  the  General  Price 
Level  of  Stocks 60 

Chapter  VII.  The  General  Price  Level  of  Stocks 

and  Commodity  Prices 64 

Chapter  VIII.  The  General  Price  Level  of  Stocks 

and  Crop  Production 73 

Chapter  IX.  The  General  Price  Level  of  Stocks 

and  Trading  on  the  Stock  Exchanges 81 

Chapter  X.  Psychological  Factors  and  the 

General  Price  Level  of  Stocks 84 

Chapter  XI.  Conclusion...: 97 

Appendix  A.  Nature  and  Source  of  the  Data; 

Preparation  of  the  Graphs 105 

Bibliography.  131 


-1- 

CHAPTER  I.  INTRODUCTION 

The  prices  of  stocks  listed  on  the  New  York  Stock  Exchange  are  subject 
to  wide  variations  in  price  from  time  to  time.  In  the  first  place,  particular 
issues  of  stocks  fluctuate  in  price  as  the  condition  of  the  corporation  issuing 
them  changes.  In  the  second  place,  these  same  stocks  considered  as  a group,  or 
as  a unit,  fluctuate  in  price  as  the  condition  of  business  enterprise,  generally 
considered,  changes.  This  second  movement  is  said  to  be  the  general  movement  of 
prices  for  stocks,  and  when  we  speak  of  the  prices  of  stocks  considered  as  a 
group  or  as  a unit,  we  are  speaking  of  the  general  price  level  of  stocks. 

This  terminology  has  been  borrowed  from  that  employed  in  the  statistics 
of  price  levels  for  commodities*.  Since  the  prices  of  stocks  have  a general 
price  level  in  Just  the  same  sense  that  the  prices  of  commodities  may  be  said  to 
have  such  a level,  it  is  quite  in  order  to  employ  this  terminology  here.  The 
general  price  level  of  commodities  is  represented  by  an  index  number.  These  in- 
dex numbers  are  made  up  in  a number  of  different  ways,  but  the  principle  underly- 
ing them  all  is  the  same.  The  general  price  level  of  commodities  is  represented 
by  selecting  a certain  number  of  commodities  which  are  believed  to  be  represanta- 

tive  for  the  purpose  at  hand  and  then  using  prices  as  a criterion  of  the  general  . 

A 

price  level  of  commodities.  A sum,  average,  median,  mode,  or  percentage  based  on 
the  regular  series  or  the  harmonic  series  may  be  used  in  obtaining  one  number 
which  is  held  to  show  the  absolute  or  relative  price  for  the  particular  period**. 
The  general  price  level  of  stocks  may  be  expressed  in  a similar  manner.  It  is 
possible  to  select  a list  of  securities,  make  an  average  of  their  prices  for  each 
month  of  the  period  considered,  and  use  these  averages  as  an  index  number  of  the 
prices  of  stocks  for  this  period. 

*Cf . U.S.  Bureau  of  Labor  Statistics  #173,  Wholesale  Prices,  entitled.  The  Making 
and  Using  of  Index  Numbers.*  by  Dr.  W.  C.  Mitchell. 

**Ibid. 


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Two  index  numbers  of  the  prices  of  stocks  have  been  prepared  for  the 
period  1890  to  1918.  One  index  number  represents  the  general  price  level  of  rail- 
road stocks  and  the  other  index  number  represents  the  general  price  level  of 
other  stocks.  Both  of  these  indices  are  based  upon  monthly  data  and  a full  de- 
scription of  the  nature  and  source  of  the  data  used  and  the  method  used  in  their 
preparation  is  given  in  Appendix  A. 

It  is  proposed  to  compare  and  correlate  these  indices  of  the  prices  of 
stocks  with  certain  other  indices  of  the  condition  of  business  enterprise.  These 
other  indices  are:- 

Earnings  and  Dividends  Group* 

Interest  Rates 

Call  loans  at  the  New  York  Stock  Exchange 
Rate  on  60-90  day  single  name  commercial  paper 
Rate  on  4-6  months  "choice"  commercial  paper 
Average  rate  of  interest  on  10  American  railway  bonds 

Average  loans  of  the  New  York  City  banks 
Average  deposits  of  the  New  York  City  banks 
Average  reserves  of  the  New  York  City  banks 

Total  quantity  of  money  in  circulation  in  the  United  States 

Business  Enterprise  Group* 

New  incorporations  in  the  eastern  states 

Building  permits  involving  more  than  one  million  dollars 

Number  of  business  failures 

Unfilled  orders  of  the  United  States  Steel  Corporation 

Tonnage  of  pig  iron 

Shipments  of  anthracite  coal 

Clearings  of  the  New  York  City  banks 

Clearings  of  banks  outside  New  York  City 

Listings  of  stocks  on  the  New  York  Stock  Exchange 

Listings  of  bonds  on  the  New  York  Stock  Exchange 

Foreign  Trade  Group: 

Average  rate  of  sterling  exchange 
Total  imports  of  the  United  States 
Total  exports  of  the  United  States 

Commodity  Prices  Group : 

An  index  number  of  the  prices  of  raw  materials 


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An  index  number  of  the  prices  of  manufactured  commodities 
An  index  number  of  the  prices  of  all  commodities 

Cron  Production  Group: 

Production  of  wheat 
Production  of  corn 
Production  of  oats 
Production  of  potatoes 
Production  of  cotton 

Stock  Exchange  Activity  Group: 

Volume  of  sales  on  the  New  York  Stock  Exchange 
Clearings  on  all  the  stock  exchanges  in  the  United  States 

Psychological  Factors: 

These  indices,  which  have  been  termed  "psychological  factors",  consist 
of  news  items  dealing  with  important  events,  judicial  decisions,  legis- 
lative enactment,  advance  crop  reports,  etc. 

All  of  these  indices,  including  those  of  the  general  price  level  of 

stocks  and  except  the  psychological  factors,  have  been  plotted  upon  graphical 

paper.  A separate  chart  has  been  used  in  the  case  of  each  group  of  indices. 

Monthly  data^hae-  been  used  for  all  the  indices  except  those  for  earnings  and 

dividends,  listings  of  stocks  and  bonds  on  the  New  York  Stock  Exchange,  and  pro- 

W/O4- 

duction  of  crops.  Annual  data  has-been  used  for  those  indices  where  it  was  not 

A 

possible  to  obtain  representative  monthly  data.  A complete  description  of  the 
nature  and  source  of  the  data  and  the  methods  employed  in  plotting  the  data  for 
these  indices  upon  the  charts  will  be  found  in  appendix  A.  A full  set  of  blue 
prints  of  these  charts  will  be  found  appended  to  this  study.  It  was  not  possi- 
ble to  plot  the  psychological  factors  upon  graphical  paper,  because  of  the  lack 
of  a standard  unit  of  measure  for  these  items.  In  chapter  X,  the  important  psy- 
chological factors  are  mentioned  in  connection  with  the  period  to  which  they  per- 
tain. A description  of  the  nature,  source,  and  collection  of  this  information 
will  be  found  in  appendix  A. 

The  object  of  the  correlation  and  comparison  of  the  indices  of  the 
prices  of  stocks  with  the  various  groups  of  other  indices  is  twofold.  In  the 


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first  place,  it  is  desired  to  unravel  as  roach,  as  possible  of  the  causal  nexus 
underlying  the  fluctuations  of  the  prices  of  stocks;  to  find  out  to  what  extent 
the  prices  of  stocks  are  governed  by  economic  factors  and  conditions;  and  to  es- 
timate the  possibility  of  formulating  a law  or  series  of  laws  underlying  the 
movements  that  the  general  price  level  of  stocks  makes.  In  the  second  place,  it 
is  desired  to  examine  the  general  price  level  of  stocks  and  to  see  to  what  extent 
it  is  representative  of  the  condition  of  business  enterprise;  to  see  if  an  index 
number  of  the  prices  of  stocks  fluctuates  with  changes  in  business  enterprise; 
and  to  see  if  it  is  a satisfactory  "barometer"  for  use  in  determining  business 
policy. 

The  chapter  plan  of  this  study  follows  the  grouping  that  was  used  in 
the  case  of  the  various  indices.  In  chapter  II,  the  general  price  level  of 
stocks  is  considered  independently  of  any  other  indices.  In  chapter  III  it  is 
compared  and  correlated  with  the  earnings  and  dividends  group  of  indices.  In 
chapter  IV  the  general  price  level  of  stocks  is  compared  and  correlated  with  the 
monetary  and  banking  group  of  indices.  This  chapter  plan  and  arrangement  is 
carried  through  until  all  the  groups  of  indices  have  been  compared  and  correlat- 
ed with  the  general  price  level  of  stocks.  The  last  chapter  deals  with  the  con- 
clusions and  results  of  this  investigation.  At  the  end  of  each  chapter,  except 
the  last  one,  will  be  found  enumerated  the  particular  results  of  the  correlation 
and  comparison  that  was  made  in  that  chapter.  There  is  also  included  an  appen- 
dix and  a bibliography.  The  appendix  deals  with  the  nature  and  source  of  the 
data,  the  making  of  the  various  indices,  and  the  making  of  the  charts  and  graphs. 
The  bibliography  is  composed  of  selected  works  on  the  subject  of  crises,  scien- 
tific method,  history  of  the  period  1890-1918,  investment  and  speculation,  and 
sources  of  data.  The  scope  of  this  investigation  does  not  warrant  any  extended 
discussion  of  these  various  topics  covered  by  the  bibliography  outside  of  those 


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things  that  are  absolutely  essential  to  a proper  grasp  of  the  material  presented 
and  the  problem  at  hand.  The  various  kindred  fields  touched  by  this  invest! gar- 
tion  are  fully  covered  by  the  works  listed  in  the  bibliography  and  the  reader  is 
referred  to  the  works  there  mentioned  for  a discussion  of  these  related  topics. 

In  order  to  make  the  discussion  in  the  following  chapters  as  clear  as 
possible,  the  technical  words  and  phrases  used  will  be  defined  and  discussed  in 
the  remaining  paragraphs  of  this  chapter. 

Definition  of  Terms: 

General  Price  Level  of  Stocks:-  This  phrase  refers  to  the  prices  of  the 
stocks  listed  on  the  New  York  Stock  Exchange  considered  as  a group  or  as  a unit 
in  contradistinction  to  the  prices  of  particular  stocks.  In  this  discussion,  the 
general  price  level  of  stocks  is  represented  by  an  average  of  the  prices  of  a se- 
lected list  of  railroad  and  other  stocks  in  just  the  same  manner  that  an  index 
number  of  commodity  prices  is  held  to  represent  the  general  price  level  of  com- 
modities. 

Index  (-plural,  indices):-  The  word  index,  or  indices,  refers  to  a series  of 
data  which  is  held  to  represent  numerically  some  phase  of  business  enterprise  or 
of  economic  conditions. 

Graph:-  In  this  investigation  the  word  "graph"  refers  to  an  index  which  has 
been  plotted  to  a definite  and  symmetrical  scale  so  as  to  bring  out  all  the  move- 
ments and  variations  which  are  held  to  be  important  for  purposes  of  this  investi- 
gation. 

Chart:-  The  word  "chart"  refers  to  the  record  upon  which  the  various  grouped 
indices  have  been  plotted. 

Psychological  Factors:-  This  phrase  refers  to  those  things  whidi  are  held 
to  affect  the  general  price  level  of  stocks  or  the  condition  of  business  enter- 
prise, which  do  not  lend  themselves  to  graphical  treatment  because  of  the  lack  of 


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a standard  unit  of  measurement. 

Secular  Trend;-  Secular  trend  refers  to  the  movement  that  some  of  the  indi- 
ces make,  which  is  persistent^ of  duration  of  the  entire  period  compassed  by  the 
data;  which  is  not  cyclical  or  periodic;  and  Which  shows  the  long-time,  ^neral, 
movement  of  that  phase  of  business  enterprise  which  the  particular  index  is  held 
to  represent. 

Major  Cycle:-  This  term  refers  to  the  longest  periodic  movement  that  some 
of  the  indices  are  observed  to  make,  which  is  composed  of  at  least  two  phases; 
a period  of  rising  values  and  a period  of  falling  values.  The  duration  of  this 
movement  for  a complete  cycle  varies  between  seven  and  fifteen  years. 

Minor  Cycle:-  This  term  refers  to  the  second  to  largest  periodic  movement, 
that  some  of  the  indices  are  observed  to  make,  which  is  composed  of  both  a phase 
of  rising  values  and  of  falling  values.  The  duration  of  this  movement  for  a com- 
plete cycle  varies  between  two  and  five  years. 

Seasonal  Cycle:-  This  phrase  refers  to  the  smallest  periodic  movement,  that 
some  of  the  indices  are  observed  to  make,  which  consists  of  a phase  of  rising 
values  and  a phase  of  falling  values,  and  which  is  always  embraced  within  a sin- 
gle year. 

Month  to  Month  Variation:-  This  phrase  refers  to  those  movements,  that  some 
of  the  indices  are  observed  to  make,  which  is  of  a highly  irregular  character, 
is  not  cyclical  or  periodic,  and  which  never  exceeds  a month  in  duration. 


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CHAPTER  II.  THE  CSaffiRAL  PRICE  LEVEL  OF  STOCKS  INDE- 
PENDENTLY CONSIDERED. 

The  data  for  the  indices  of  the  prices  of  stocks  has-been  plotted  in 
graphical  form  on  a chart  which  will  he  found  appended  to  this  study.  This  chart 
is  composed  of  two  graphs  as  follows: 

1.  An  Index  Number  of  the  Prices  of  Railroad  Shares. 

2.  An  Index  Number  of  the  Prices  of  the  Shares  in  other  Corporations. 

The  data  for  these  two  indices  is  monthly  in  character  throughout. 

There  are  four  distinct  movements  which  these  indices  are  observed  to 
make.  In  the  first  place,  considering  both  lines  in  the  whole,  they  are  observed 
to  make  a general  movement  upward  extending  over  the  entire  period  from  1890  to 
1918.  This  general  movement  is  by  no  means  steady,  but  is  quite  irregular  in 
character  and  embraces  many  smaller  movements  within  itself.  The  name  ”secular 
trend”  has  been  applied  to  this  movement.* 

Now  this  upward  secular  trend,  in  the  case  of  the  prices  of  stocks, 
may  indicate  one  of  four  things.  It  may  seem  that,  during  the  period  considered, 
business  enterprise  was  becoming  more  profitable.  In  the  second  place,  it  may 
mean  that  the  gradual  increase  in  the  general  price  level  of  stocks  merely  re- 
flects the  effect  of  a gradual  increase  in  the  quantity,  or  velocity  of  circula- 
tion, of  the  amount  of  money  and  credit.  In  the  third  place,  it  may  mean  that 
business  enterprise  has  remained  stationary  in  profits,  but  that  the  average  rate 
of  return  on  investments  has  been  lewer,  and  that  this  downward  tendency  in  the 


*Cf.  The  Review  of  Economic  Statistics,  prel.  vol.  1,  no.  1,  p 8;  Persons,  W.  M. , 
The  Variate  Difference  Method  and  Curve-Pitting.  Quarterly  Publications  of  the 
American  Statistical  Association.  June,  1917;  Persons,  W.  M. , The  Construction  of 
a Business  Barometer:  Annual  Data.  The  American  Economic  Review,  December,  1916. 


-8- 


investment  rate  of  interest  has  "been  reflected  "by  an  increased  capital  value  in 
the  shares  in  business  enterprise.  Finally,  such  an  increase  in  the  secular 
trend  may  be  due  to  some  combination  of  the  proximate  causes  already  mentioned. 
These  questions  cannot  be  settled  definitely  until  the  work  of  analysis  and  cor- 
relation has  been  completed. 

The  movement  next  in  size  to  the  secular  trend  has  been  given  the  term 
of  "major  cycle”.  The  indices  show  one  complete  major  cycle  and  the  greater  por- 
tions of  two  other  major  cycles.  The  first  major  cycle  that  the  data  shows  be- 
gins in  January,  1890,  and  extends  to  August,  1896.  This  is  not  a complete  major 
cycle,  but  the  greater  part  of  the  first  half  movement  which  began  about  1886. 
This  half  is  a "valley"  type;  that  is,  it  is  a period  during  which  values  are  ra-. 
-f-lact 3 yply-  low.  After  August,  1896,  values  take  an  upward  turn  and  from  August, 
1896  to  September,  1906  there  is  a complete  half  of  a major  cycle  of  the  "crest” 
type,  that  is,  when  values  are  relatively  high.  During  this  period,  there  is  one 
peculiarity  that  is  quite  noteworthy.  Although  the  values  of  railroad  and  other 
shares  follow  each  other  quite  closely,  the  railroad  shares  are  at  a much  higher 
level  than  the  other  shares.  There  is  a difference,  on  the  average,  of  between 
forty  and  fifty  points  and  this  difference  extends  over  the  entire  period  com- 
passed by  the  major  cycle  - approximately  ten  years.  There  will  be  a certain 
amount  of  difficulty  in  explaining  this  phenomenon,  because  it  is  difficult  to 
conceive  of  such  a wide  discrepancy  extending  over  such  a long  period  of  time. 
This  point  will  receive  attention  in  chapter  III.  After  September,  1906,  the 
third  major  cycle  can  be  noticed,  which  extends  through  1918,  as  far  as  the  data 
is  carried.  This  movement  is  but  half  of  a complete  major  cycle  and  is  of  the 
"valley"  type.  During  its  period,  values,  relatively  speaking,  declined. 

Each  one  of  the  major  cycles  embraces  within  it  two  or  more  "minor  cy- 
cles". The  minor  cycle  resembles  the  major  cycle  greatly,  and  they  are  superim- 
posed upon  the  major  cycle,  but  they  are  of  considerably  smaller  duration, a*d» 


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intensity*  These  are  the  cycles  usually  referred  to  as  the  "business  cycle  move- 
ment". 

The  first  half  of  a minor  cycle  embraced  by  the  data  is  one  which  be- 
gins in  January,  1890,  and  ends  in  December,  1890.  During  the  first  four  months 
of  1890  values  for  both  railroad  and  other  stocks  rose.  In  May  of  the  same  year 
a sharp  decline  followed  which  lasted  until  December,  1890.  This  is  often  refer- 
red to  as  the  panic  of  1890.  This  panic  manifested  itself  in  England,  the  conti- 
nent, and  the  United  States  at  about  the  same  time.*  In  January,  1891,  a recovery 
from  the  panic  of  1890  set  in  and  values  rose  steadily  until  January,  1893.  The 
January,  1891  to  August,  1893  period,  then,  embraces  the  second  minor  cycle, 
which  lasts  for  exactly  two  years  and  eight  months.  After  January,  1893,  a reac- 
tion set  in  and  there  is  a depression  from  this  time  to  May,  1897.  This  was  a 
period  of  long  and  continued  depression  save  for  a few  months  of  reaction  in  1895. 
The  area  embraced  by  this  depression  is  a large  one.  This  period  is  generally 
referred  to  as  the  panic  of  1893**  The  area  compassed  by  the  period  of  low  val- 
ues is  great.  In  June,  1897  values  again  turn  upward  and  the  ensuing  rise  lasts 
until  January,  1903.  This  is  a period  of  sharply  rising  values  of  fairly  uniform 
trend,  and  is  commonly  referred  to  as  the  reaction  from  the  panic  of  1893,  or  the 
period  of  business  activity  in  the  late  nineties.  This  period  was  characterized 
by  a buoyant  feeling  among  business  men,  promotion  of  new  enterprise,  and  inte- 
gration among  older  establishnents.  A few  months  before  January,  1903  there  was 
a small  decline  and  rally  on  the  part  of  railroad  stocks.  The  decline,  however, 
set  in  definitely,  for  railroad  stocks  in  January  1893,  but  it  was  not  until  the 
following  February  that  the  other  stocks  turned  definitely  downward.  The  decline 
lasted  until  May,  1904,  for  both  groups  of  stocks  and  is  commonly  referred  to  as 
the  panic  of  1903  and  1904.  The  decline  was  a rather  sharp  one,  but  it  did  not 

compass  the  area  that  the  panic  of  1893  embraced.  The  period  of  decline  was  not 

♦For  a discussion  of  the  panic  of  1890  in  the  U.S.  and  elsewhere  see  Lauck,  W.  J. , 

Causes  of  the  Panic  of  1893.  Chapters  I to  VI,  incl. 

**lbid. , Chapters  VI  to  end. 


. 


. 


- 


■ 

♦ 

. 


. 


■ 


' . - . 


■ 


1 


. . 


. . 


followed  immediately  by  a rise  in  price,  but  the  prices  stayed  at  a low  level  for 
approximately  a year.  The  rise  in  price  that  began  in  May,  1904,  culminated  in 
September,  1906,  for  railroad  stocks,  and  in  October,  1906  for  other  stocks.  The 
rise  in  price  was  a sharp  one  and  of  fairly  steady  growth.  This  rise  was  stopped 
by  the  severe  panic  of  1907  which  began  in  September-October , 1906  and  culminated 
in  February,  1908.  A very  rapid  decline  of  short  duration  characterized  this 
movement,  which  is  commonly  referred  to  as  the  panic  of  1907,  the  "Wall  Street 
panic",  or  "the  rich  man’ s panic”.  The  recovery  from  this  panic  began  in  Febru- 
ary, 1908,  and  ended  in  August,  1909,  for  railroad  stocks,  and  in  November,  1909 
for  other  stocks.  The  recovery  was  equally  great  as  the  decline  had  been.  A 
period  of  decline  again  set  in  which  ended  in  July,  1910  and  was  followed  by  a 
very  gradual  rise  until  September,  1912.  This  rise  was  then  followed  by  a period 
of  decline  ending  in  the  closing  of  the  New  York  Stock  Exchange  in  August,  1914, 
when  the  stock  exchange  was  in  a condition  of  panic  over  the  European  war  situa- 
tion. This  period  of  decline  was  not  a period  of  panic,  but  in  July  and  August, 
1914,  it  became  apparent  that  a severe  panic  would  occur  unless  immediate  steps 
were  taken  to  prevent  further  liquidation  upon  the  exchange.  The  exchange  was 
then  closed.  The  break  in  prices  that  occurred  in  July  and  August,  1914  is  re- 
ferred to  as  the  panic  of  1914,  or  "the  great  war  panic".  The  New  York  Stock 
Exchange  was  re-opened  in  December,  1914  and  a rise  in  the  prices  of  stocks  set 
in  which  lasted  until  November,  1916.  This  rise  was  followed  by  a decline  which 
was  of  some  severity  and  culminated  in  November,  1917,  a new  rise  beginning  at 
this  time  lasting  until  December,  1918,  where  the  data  stops. 

These  alternate  rises  and  declines  are  of  a duration  from  slightly  less 
than  a year  to  approximately  five  years.  These  movements,  like  the  major  cycles, 
are  cyclical  in  character,  reaction  always  following  action.  They  have  been 
termed  the  "minor  cycle"  to  differentiate  them  from  the  larger  cyclical  swings. 


. 


' 

■ 


' 


-11- 

The  minor  cycles  compass  still  another  series  of  movements  of  a highly 
irregular  character.  These  are  the  movements  lasting  from  three  to  twelve  months 
in  time.  At  least  two  distinct  movements  can  he  distinguished:  the  first  is  a 
cyclical  movement,  highly  irregular  in  its  occurrence,  hut  nevertheless  quite  per- 
sistent in  its  appearance;  the  second  is  an  irregular  month  to  month  movement, 
which  is  not  cyclical  in  its  character.  It  may  he  thought  that  the  first  of  these 
two  smaller  movements  is  a seasonal  variation,  and  a careful  examination  of  the 
graph  shows  that  this  is  the  case.  Seasonal  variation  usually  is  fairly  regular 
in  its  occurrence.  There  are  many  influences  which  operate  to  destroy  the  uni- 
formity of  these  seasonal  variations.  They  are,  however,  persistent  and  charac- 
teristic enough  to  he  distinguished  as  such.*  Just  what  these  causes  are  remains 
to  he  seen  as  we  proceed  with  the  analysis.  The  term  "seasonal  cycle"  has  been 
applied  to  these  movements.  The  remaining  irregular  movements  have  been  termed 
"monthly  variations". 

This  entire  division  of  the  graph  into  movements  and  cycles  is  a purely 
arbitrary  one.  The  secular  trend  may  he  only  a part  of  a much  larger  movement, 
cyclical  in  character,  that  is  not  shown  by  the  data.  However,  it  appears  on  the 
graphs  used  here  as  a trend  rather  than  a cycle,  and  we  have  no  means  of  telling 
whether  it  is  a part  of  such  a larger  movement  or  not.  This  could  best  he  done 
by  taking  annual  data  for  as  long  a period  as  possible,  and  plotting  it  on  a 
graph  to  a small  scale.  The  terminology  and  classification  of  movements  herein 
given  is  also  an  arbitrary  one,  used  merely  on  account  of  convenience  for  pur- 
poses of  this  study,  but  it  has  general  acceptance  among  economists.  The  cycli- 
cal and  other  movements  are  distinct  and  real.  The  secular  trend  and  the  major, 
minor,  and  seasonal  cycles  are  the  points  of  great  interest.  We  are  faced  with 
the  questions;  why  has  the  secular  trend  been  upward?  What  is  indicated  by  this 


♦The  Review  of  Economic  Statistics,  prel.  vol.  1,  no.  1,  page  8. 


-12- 


fact?  Why  have  we  movements  of  a fairly  regular  cyclical  character?  Why  are 
they  cyclical?  These  are  the  questions  to  he  faced  at  the  beginning  of  the  work 
of  analysis. 

In  studying  the  cycles,  especially  the  minor  cycle,  certain  important 
characteristics  can  he  noted.  The  first  point  is  the  size  of  the  area  compassed 
hy  a complete  cyclical  movement,  i.e.;  a decline  and  reaction.  The  second  point 
is  the  shape  of  the  area  embraced.  An  area  where  the  temporal  element  is  longer 
than  the  quantitative  or  price  element,  that  is,  an  area  which  may  he  called  a 
broad  one,  is  a period  of  long  standing  depression.  Here  the  business  man  is  able 
to  retrench  for  a period  of  inactive  business  and  has  the  time  to  adjust  his  busi- 
ness to  face  the  new  conditions.  The  wage  earner  is  likely  to  find  a smaller  com- 
pensation for  this  period  as  a result  of  such  readjustment.  An  area  where  the 
temporal  element  is  shorter  than  the  quantitative  or  price  element,  that  is,  an 
area  which  may  be  called  a narrow  one,  is  a period  of  rapid  decline  in  price  fol- 
lowed quickly  by  an  equally  rapid  reaction.  This  type  of  cycle  is  likely  to  bring 
many  failures  in  its  wake,  with  very  little  time  for  entrepreneurs  to  adjust 
themselves  to  new  conditions.  Such  businesses  as  are  able  to  withstand  the  shock 
have  an  excellent  opportunity  to  make  money  during  the  period  of  rapid  recovery. 
Although  many  wage  earners  may  be  temporarily  out  of  work,  the  decline  in  wages 
will  not  be  nearly  so  general  as  in  the  case  of  the  other  type  of  cycle,  and  they 
will  soon  be  able  to  sell  their  services  on  a rapidly  rising  market.  The  econom- 
ics of  these  two  types  of  cycles  as  well  as  the  psychology  of  them,  will  be  ex- 
amined and  discussed  as  the  analysis  proceeds  with  the  various  factors. 

Attention  has  already  been  drawn  to  the  fact  that  some  differences  ex- 
ist between  the  prices  of  railroad  stocks  and  other  stocks.  On  the  whole,  the 
movements  follow  each  other  rather  closely  and  there  does  not  appear  to  be  any 
marked  lag  between  these  two  groups.  In  some  instances  other  stocks  rise  or  fall 
without  any  apparent  movement  of  like  nature  on  the  part  of  the  railroad  stocks 


. 

' 

* 


. 


. 

■ 

- 

•.  5,  v\  ..  ‘ 


-13- 


and  vice-vorsa.  It  is  difficult  to  draw  any  general  statements  as  to  the  regu- 
larity of  movement  between  these  two  groups  of  stocks,  such  as  size  of  movements, 
smoothness  of  movements,  or  number  of  different  movements.  In  some  instances  the 
other  stocks  group  will  show  the  greater  variation  along  these  lines,  and  in 

other  instances  the  railroad  stocks  will  show  the  greater  variation.  The  most 

'V u±> 

outstanding  fact  has  ^already  been  mentioned;  that  is,  the  differences  in  the  gen- 
eral level  of  the  railroad  stocks  group  and  the  other  stocks  group  at  certain  in- 
tervals. From  January,  1890,  to  January,  1893  there  is  a difference  of  approxi- 
mately ten  points  between  the  two  levels.  From  January  1893  until  the  break  in 
the  line  at  December,  1899,  the  two  groups  continue  at  nearly  the  same  level  with 
the  railroad  group  at  a slightly  higher  level.  From  January,  1900  until  the  time 
of  the  closing  of  the  stock  exchange,  a period  of  over  fourteen  years,  the  rail- 
road stocks  are  at  a very  much  higher  general  level  than  the  other  stocks  group. 
In  the  years  1907  and  1908  this  difference  is  less  pronounced  than  at  the  other 
times.  After  the  re-opening  of  the  exchange  in  1914  the  two  groups  come  together 
gradually,  with  the  railroad  group  at  the  higher  level,  and  they  continue  to  move 
closer  together  as  the  end  of  the  data  appears. 

Why  is  it  that  the  railroad  group  is  at  a consistently  higher  general 
level  of  price  than  the  other  stocks?  Since  it  is  apparent  that  the  condition 
of  the  railroads  is  dependent  upon  the  condition  of  business  in  general  it  is 
difficult  to  see  just  why  there  should  be  this  discrepancy  between  the  movements 
of  the  two  groups.  The  answer  to  this  question  must  show  that  either  one  or  the 
other  of  the  groups  of  stocks  is  not  representative  of  the  condition  of  business 
enterprise,  or  else  there  are  important  differences  in  the  method  of  capitaliza<- 
tion  or  earning  ability  between  railroads  and  other  industries.  If  the  data  is 
representative  and  accurate,  then  it  must  be  that  the  industrial  or  other  enter- 
prises are  overcapitalized  relative  to  the  railroad  enterprises,  or  else  their 
earning  ability  is  greater,  or  that  they  enjoy  move  favor  with  investors.  A 


. 


* 


1 

, 


- 


’ I I' 


-14- 


greator  earning  ability  may  come  from  high  freight  rates  or  some  maladjustment 
of  conditions  in  manufacturing  enterprise.  It  is  possible  to  conceive  that  there 
can  be  heavy  shipments  of  freight  during  a period  when  business  enterprise  is  not 
being  conducted  on  a highly  profitable  scale.  This  condition  might  be  brought 
about  by  a period  of  falling  commodity  prices;  a period  where  the  prices  of  raw 
materials  are  advancing  faster  than  manufactured  commodities;  or,  finally,  where 
business  enterprise  is  being  poorly  managed,  especially  with  reference  to  know- 
ledge of  costs.  In  order  for  railroads  to  make  money  while  other  industries  are 
doing  poorly,  it  is  necessary  for  the  shipments  of  freight  to  continue,  and  this 
condition  could  only  be  found  where  business  enterprise  is  being  conducted  on  a 
considerable  scale,  even  though  it  is  not  highly  profitable.  If  the  difference 
in  the  general  level  of  stock  prices  between  railroad  and  other  stocks  is  not 
due  to  differences  in  earning  ability,  then  we  must  look  to  differences  in  capi- 
talization for  our  answer.  No  complete  answer  to  these  questions  can  be  given 

until  the  work  of  analysis  and  correlation  has  been  completed. 

> 

The  word  "cycle”  may  be  open  to  two  possible  interpretations.  It  is 
usually  held  to  mean  a complete  movement,  decline  and  reaction,  or  rise  and  re- 
action, where  prices  will  be  at  the  same  level  at  the  completion  of  the  movement 
that  they  were  at  the  beginning.  On  the  other  hand,  the  word  may  be  held  to 
mean  merely  one  half  of  a completed  movement,  from  the  point  where  the  rise  or 
decline  begins  to  the  point  where  it  ends,  neglecting  entirely  the  reaction.  In 
measuring  cycles  in  this  study  it  is  the  latter  meaning  that  has  been  used.  The 
cycles  are  studied  by  examining  each  half  at  a time.  While  this  may  not  be  logi- 
cally as  sound  it  has  the  great  advantage  of  convenience  for  the  work  of  analysis 
and  correlation,  and  this  is  the  reason  for  its  adoption.  In  order  to  be  classed 
as  cyclical,  movements  must  show  a reaction  of  opposite  nature  to  the  action. 

No  movements  which  fail  to  show  this  tendency  have  been  classed  as  cyclical  in 
this  study. 


. 

. 


. 

■ 


-15- 


A great  deal  more  might  he  said  about  the  movements  of  the  general  level 
of  prices  for  railroad  and  other  stocks  than  has  been  dene  here,  but  these  other 
considerations  will  be  brought  out  in  analyzing  and  correlating  the  general  price 
level  of  stocks  with  the  various  other  factors.  Attention  has  been  drawn  to  the 
principal  movements  of  these  prices  and  to  the  character  of  these  movements. 

Their  significance  and  importance  will  become  apparent  in  the  following  analyti- 
cal chapters. 

Conclusions  and  Summary: 

1.  That  there  are  four  movements  characteristic  of  the  general  price 
level  of  stocks,  namely; 

(a)  The  secular  trend,  which,  in  this  case,  is  a steady  and 
gradual  upward  movement  of  the  prices  of  stocks.  The  occasions  for 
this  movement  may  be  either  changes  in  the  general  level  of  prices; 
changes  in  the  condition  of  business  enterprise;  changes  in  the  cap- 
italization of  corporate  industries;  or  changes  in  the  market  rates 
of  interest. 

(b)  The  major  cycle,  the  largest  cyclical  movement  which  these 
prices  appear  to  make,  which  is  a movement  of  from  seven  to  fifteen 
years  in  duration.  The  occasions  for  these  major  cycles  is  not  ap- 
parent with  the  analysis  in  its  present  stage. 

(c)  The  minor  cycle,  a cyclical  movement  of  a shorter  duration 
than  the  major  cycles,  usually  from  one  to  five  years  in  duration. 

The  occasions  for  this  movement  are  not  apparent  with  the  analysis 
in  present  stage. 

Cd)  The  seasonal  cycle,  the  shortest  cyclical  movement,  of  from 
six  to  twelve  months  in  duration.  The  occasions  for  this  movement 
are  not  apparent  with  the  analysis  in  its  present  stage. 


: 

. 


. — « •'  >*■-&  H i mat® 


- 


i 


* 


. 

1 1 


-16- 


2.  The  general  level  of  the  prices  of  railroad  stocks  is  at  a higher 
level  than  that  of  other  stocks#  This  is  believed  to  he  due  to  the  fact  that 
business  enterprise  is  subject  to  certain  maladjustments,  which  affect  the  rate 
of  profit  for  industries,  but  do  not  greatly  cut  down  the  traffic  for  railroads, 
and  also  to  the  fact  that  railroad  securities  find  greater  favor  with  the  in- 
vesting public  than  do  other  securities. 


-17- 


CHAPTER  III.  THE  GENERAL  PRICE  LEVEL  OF  STOCKS  AMD 
EARNINGS  AND  DIVIDENDS. 

It  is  the  object  of  this  chapter  to  call  attention  to  some  of  the  more 
outstanding  relationships  existing  between  the  general  level  of  prices  of  stocks, 
both  railroad  and  other  stocks,  and  the  earnings  and  dividends  of  these  corpor- 
ations. The  "Earnings  and  Dividends  Group"  is  to  be  correlated  with  "The  Index 
Number  of  Stock  Prices".  As  stated  in  Appendix  A,  earnings  and  dividends  have 
been  recorded  not  only  for  the  corporations  whose  stock  prices  were  used  in  mak- 
ing up  the  indices  of  stock  prices,  but  also  for  corporations  not  so  used.  The 
list  of  indices  comprising  the  "Earnings  and  Dividends  Group"  are  as  follows 

Annual  Dividend  Payments,  Railroads  used  on  stock  price  index 
Annual  Dividend  Payments,  other  corporations  used  on  index 
Annual  Gross  Earnings,  railroads  used  on  index 
Annual  Dividend  Payments,  all  railroads 
Monthly  Gross  Earnings,  ten  leading  railroads 

The  reader  is  referred  to  Appendix  A for  the  source  of  this  data  and 
for  the  logical  reasons  which  led  to  its  selection. 

The  graphs  for  the  indices  mentioned  above  have  been  plotted  on  a 
chart  labelled  "Earnings  and  Dividends  of  Railroad  and  Other  Corporations".  This 
chart  will  be  found  appended  to  this  study. 

OLaJL, 

With  one  exception,  the  data  for  the  earnings  and  dividends  group 
entirely  annual  in  character.  For  this  reason,  many  of  the  smaller  movements 
that  the  prices  of  stock  show,  will  have  no  counterpart  in  the  movements  of  the 
earnings  and  dividends.  However,  most  of  the  larger  movements  are  quite  dis- 
tinct. In  the  first  place,  all  five  graphs  exhibit  the  upward  secular  trend 
quite  clearly.  The  secular  trend  moves  upward  at  approximately  the  same  rate 
that  the  secular  trend  moves  upward  in  the  case  of  the  prices  of  stocks.  In  the 
next  place,  the  major  cyclical  movement  is  quite  apparent  and  corresponds  very 


- 


( r 

. 

• 

-A  - 

' , 

. 

■ 

■ 

* 


* 


■ 

* 

. ■ : 

. 

• • ■ ...  ••  •• 


-le- 


closely  to  this  movement  in  the  case  of  the  prices  of  stocks  with  the  exception 
of  the  upward,  half  of  the  second  major  cycle.  In  the  case  of  the  prices  of 
stocks  this  major  cycle  begins  in  1897  and  ends  in  1909,  about  a year  and  a half 
before  the  same  cycle  ends  for  earnings  and  dividends.  All  four  groups  of  the 
annual  data  do  not  show  the  same  minor  cycles.  While  the  minor  cycle  is  present 
in  all  of  them,  it  is  not  of  the  same  intensity  and  duration  for  them  all,  and 
no  general  statement  can  be  made  as  was  the  case  with  the  secular  trend  and  the 
major  cycles.  This  will  serve  to  indicate  that  there  might  be  some  fundamental 
difference  between  the  minor  cycles  and  the  two  larger  movements,  secular  trend, 
and  the  major  cycle  - no  definite  statement  can  be  given  on  this  last  point  un- 
til we  observe  this  tendency  in  several  more  groups.  Of  the  movements  smaller 
than  the  minor  cycle,  the  seasonal  cycle  and  the  monthly  variations,  nothing  can 
be  said  with  the  annual  data.  The  monthly  data,  however,  shcwj|r  both  these  two 
smaller  movements  quite  distinctly.  This  is  another  indication  of  the  superior- 
ity of  monthly  data  over  annual  data  for  a study  of  economic  factors,  especially 
for  the  smaller  cyclical  movements.  For  an  examination  of  the  secular  trend, 
with  the  idea  in  mind  of  determining  whether  this  is  a real  trend,  or  merely  a 

part  of  a much  larger  cycle  than  has  yet  been  discovered,  annual  data  i«-super- 

A 

ior.  It  may  also  be  superior  in  some  instances  for  a careful  examination  of 
some  of  the  larger  aspects  of  the  major  cycle.  But  for  the  purpose  of  studying 
movements  of  a shorter  duration,  such  as  the  business  cycle  (minor  cycle) , the 

monthly  data  ^taTby  all  odds  the  better,  and  it  is  to  be  regretted  that  it  was 

A 

. not  possible  to  obtain  accurate  and  representative  monthly  data  for  all  the 
groups  used  in  this  investigation. 

Railroads  and  Dividends: 

The  graph  of  the  prices  of  railroad  stocks  is  similar  in  curve  to  that 
of  the  payments  of  dividends.  This  is  as  had  been  expected,  because  it  is  the 


' 


. 


. 


. 

. 


* 


. 


. 


-19- 

prospect  of  earnings  that  gives  these  shares  their  value.  Economists  agree  that 
the  capital  value  of  a share  of  stock,  or  any  durable  agent  for  that  matter,  is 
the  capitalization  of  the  income  therefrom  derived  at  the  current  rate  of  inter- 
est. It  is  the  common  practice  of  business  to  so  evaluate  income  bearing  proper- 
ty. Now  in  studying  the  indices  of  dividend  payments  of  corporations  whose  stocks 
were  used  on  the  index  number  of  stock  prices,  care  must  be  used  to  see  that  the 
element  of  time  for  this  factor  agrees  with  the  same  element  for  stock  prices. 


OkAJt— 

The  data  for  the  dividend  payments  4r&-  annual  in  character,  and  when  an  item  is 
given  for  the  dividend  payments  for  the  year,  say,  1890,  it  is  meant  for  the  year 
ending  1890.  But  the  prices  of  stocks  for  the  year  1890  are  those  prices  actu- 
ally pertaining  to  that  year.  In  making  a comparison,  then,  between  stock  prices 
and  dividends,  the  dividends  for  1891  must  be  compared  with  the  prices  of  stocks 
during  1890.  That  is  to  say,  the  graph  for  dividends  must  be  moved  one  year  a- 
head  of  the  graph  for  stock  prices.  In  the  case  of  dividends  on  all  railroads, 
it  is  only  necessary  to  move  the  graph  six  months  ahead  in  making  the  comparison, 
for  this  series  has  been  obtained  from  The  Statistical  Report  of  the  Interstate 
Commerce  Commission,  and  the  fiscal  year  ends  for  them  on  June  30th.  Thus  the 
graph  of  dividends  of  railroad  corporations  whose  stocks  were  used  in  computing 
the  index  number  is  really  one  year  behind  the  graphs  of  the  index  numbers  of 
stocks,  while  the  graph  of  dividend  payments  of  all  railroads  is  but  six  months 
behind. 


When  we  have  moved  the  graphs  showing  the  dividend  payments  of  rail- 
roads used  on  the  index  one  year  ahead  of  the  graph  showing  prices  of  stocks  of 
railroad  corporations,  it  will  be  noted  that  the  prices  of  stocks  anticipate  the 
dividend  payments  by  a period  of  about  six  months.  There  is  but  one  exceptional 
year  on  the  graph;  this  is  1891,  where  dividend  payments  decline,  while  the 
prices  of  stocks  rise  for  the  year  immediately  preceding.  This  can  be  expressed 
by  saying  that  the  graph  of  dividend  payments  has  about  a six  month*  s lag  behind 


' 


■ 


. 


, 


, . . . . 


. 


* 


. 

. 


-20- 


the  graph  of  railroad  stocks.  The  period  of  lag  cannot  be  computed  with  mathe- 
matical exactness  because  the  data  compared  annual  in  the  one  case  and  month- 
ly in  the  other.  The  period  of  lag  varies  from  three  to  nine  months;  six  months 
on  the  average.  Thus  it  is  that  putative  dividend  payments  of  railroad  corpora- 
tions are  discounted  into  a present  net  worth  of  railroad  common  stocks.  The 
prices  of  railroad  common  stocks,  then,  do  not  represent  current  dividends  capi- 
talized into  net  worth,  but  putative  future  dividends  so  capitalized.  The  pur- 
chaser of  these  shares  does  not  pay  for  present  income,  but  for  putative  future 
income.  This  fact  is  of  great  importance  in  considering  the  smaller  movements 
of  the  prices  of  stocks. 

This  same  tendency  can  be  noted  when  the  prices  of  railroad  stocks  are 
compared  with  the  dividend  payments  of  all  railroads.  The  correlation  is  not 
here  so  complete  nor  as  regular  as  it  is  with  the  dividends  of  the  railroads  ac- 
tually used  in  making  up  the  stock  prices.  In  this  case  the  exceptional  years 
are:  1900,  1907,  1908,  and  1913.  The  six  month' s lag  can  be  easily  noted  for 
the  other  years  in  this  group.  This  fact  would  seem  to  indicate  that  this  ten- 
dency is  a genuine  one  and  that  the  selection  of  stocks  has  been  fairly  represen- 
tative. 

Other  Stocks  and  Dividends: 

The  graph  showing  dividend  payments  for  other  corporations  represents 
payments  by  corporations  whose  stocks  were  used  in  making  up  the  index  number  of 
other  stocks.  There  is  no  graph  showing  dividend  payments  for  all  other  corpor- 
ations. In  this  case,  as  in  the  case  of  the  railroads,  it  will  be  necessary  to 
move  the  graph  of  dividend  payments  one  year  ahead  of  the  prices  of  the  stocks 
of  other  corporations,  because  dividend  payments  are  here  recorded  for  the  year 
ending  1890,  and  so  on,  rather  than  for  the  year  1890.  If  this  graph  will  be 
moved  ahead  as  indicated,  the  same  characteristic  six  month's  lag  can  be  noticed 
as  was  noticed  in  the  case  of  the  railroads.  This  correlation  is  not  so  regular 


- 


. 


f 


* 


. 


-21- 


for  the  other  stocks  as  it  was  for  the  railroad  stocks.  The  exceptional  years 
are:  1894,  where  the  stocks  rise  for  that  year,  but  the  dividend  payments  fall 
for  the  ensuing  year,  and  1899,  where  the  stocks  rise  for  that  year,  hut  dividend 
payments  fall  for  the  ensuing  year.  The  fact  that  the  correlation  is  not  so 
clearly  marked  for  other  stocks  as  it  is  for  railroad  stocks  may  lie  in  the  fact 
that  the  list  of  other  stocks  is  not  so  large  nor  as  representative  as  the  list 
of  railroad  stocks.  It  may  also  lie  in  the  fact  that  investors  at  certain  peri- 
ods have  expected  returns  at  a different  rate  on  railroad  stocks  from  other  stocks  , 
In  connection  with  the  dividend  payments  there  is  yet  one  other  impor- 
tant set  of  facts  to  he  noted.  This  will  he  apparent  when  the  levels  of  the  four 
groups  of  factors  (railroad  stock  prices,  other  stock  prices,  dividend  payments 
for  railroads  used  on  index,  and  dividend  payments  for  other  stocks  used  on  index) 
are  compared.  Although  the  dividend  payments  for  other  stocks  are,  in  many  in- 
stances, higher  than  the  dividend  payments  for  railroad  stocks,  the  prices  of  the 
other  stocks  are  at  a lower  level  throughout  than  the  prices  of  railroad  stocks. 
This  indicates  that  traders  in  stocks  capitalize  dividends  of  railroads  at  a 
lower  rate  of  interest  than  they  do  other  corporations.  That  is,  if  a railroad 
and  other  corporation  both  paid  four  per  cent  dividends  annually,  the  chances  are 
that  the  railroad  stock  would  sell  at  a higher  price  than  the  other  stock;  pro- 
viding, of  course,  that  both  stocks  were  representative.  This  fact  may  he  due 
to  some  lack  of  confidence  in  the  other  corporations  as  compared  with  the  rail- 
roads, and  some  further  compensation  in  the  nature  of  risk  interest  may  he  de- 
manded from  them.  This  lack  of  confidence  may  also  he  inspired  by  the  relative 
overcapitalization  of  other  corporations  as  compared  with  the  railroads.  This 
lack  of  confidence  may  he  attributed  to  a very  wide  variety  of  causes,  hut  no 
matter  what  cause  we  may  attribute  it  to,  the  extra  payment  demanded  from  the 
other  corporations  relative  to  the  railroad  corporations  may  he  said  to  partake 
of  the  nature  of  the  payment  for  risk  involved. 


-22 


It  has  already  been  noted  that  during  certain  periods  the  general  lev- 
el of  the  prices  of  railroad  shares  is  ranch  higher  than  the  general  level  of 
prices  of  the  other  stocks.  These  periods  are: 1890  to  1893,  and  1900  to  1910. 
During  both  of  these  periods  the  dividend  payments  of  railroad  corporations  are 
at  a consistently  higher  level  than  the  dividend  payments  of  the  other  corpora- 
tions. The  characteristic  lag  of  the  dividend  payments  behind  the  prices  of  the 
stocks  may  be  noticed  here  quite  clearly.  In  all  of  the  instances  where  the 
dividend  payments  of  other  corporation  cross  the  dividend  payments  of  the  rail- 
road corporations,  going  either  above  it  or  below  it,  this  movement  has  been 
foreshadowed  from  three  to  nine  months  ahead  by  either  a fall  or  rise  in  the 
prices  of  the  one  group  of  stocks  relative  to  the  other  group.  This  will  serve 
to  further  substantiate  the  fact  that  stocks  anticipate  economic  conditions. 

In  chapter  II  attention  was  called  to  the  differences  in  the  levels  of 
the  two  groups  at  certain  periods.  It  was  also  said  at  this  point  that  this 
difference  might  be  due  to  the  fact  that  either  one  of  the  groups  was  not  repre- 
sentative, that  there  were  important  differences  in  the  capitalization  of  rail- 
road corporations  relative  to  other  corporations,  or  that  there  was  some  differ- 
ence in  the  earning  ability  between  the  two.  The  fact  that  other  stocks  are 
at  a much  lower  level  when  the  dividends  of  other  corporations  are  at  a much 
lower  level  indicates  that  the  cause  might  be  that  of  earnings  rather  than  dif- 
ferences in  capitalization. 

Railroad  Stocks  and  Railroad  Gross  Earnings: 

The  data  for  the  graph  of  gross  earnings  of  railroads, used  on  index  of 

stock  prices,  **'  annual  in  character  and  was-  taken  from  The  Statistical  Report 

A.  a 

of  the  Interstate  Commerce  Commission.  The  fiscal  year  used  as  a basis  in  these 
reports  ends  June  30th.  In  making  comparison,  then,  between  this  graph  and  the 
graph  of  the  prices  of  railroad  stocks,  it  will  be  necessary  to  move  the  graph 


. 


■ 


-23- 


of  the  gross  earnings  six  months  in  advance  of  the  graph  of  the  prices  of  rail- 
road stocks.  The  graph  of  earnings  of  railroads  used  in  making  the  index  of 
stock  prices  extends  from  1890  to  1907  only,  "because  the  Interstate  Commerce 
Commission  changed  its  method  of  reporting  this  kind  of  data  at  this  point,  and 
it  was  not  possible  to  obtain  a homogeneous  series,  except  at  much  difficulty, 
past  this  point. 

The  graph  of  these  earnings  has  the  characteristic  six  month' s lag  be- 
hind the  prices  of  railroad  stocks  that  the  graph  of  the  dividend  payments  on 
these  stocks  had.  In  fact,  the  graph  of  the  gross  earnings  and  dividends  follow 
each  other  quite  closely  throughout.  There  are  but  two  exceptional  years:  1899, 
where  dividend  payments  decline,  gross  earnings  increase,  and  the  prices  of 
stocks  increase;  and  1903,  where  stocks  and  dividend  payments  decline  and  earn- 
ings increase.  These  results  are  as  might  be  anticipated,  because  it  is  only 
out  of  earnings,  under  ordinary  conditions,  that  dividends  can  be  paid,  and  it 
is  the  fact  of  dividends,  or  the  prospect  of  dividends,  that  gives  the  stock  its 
value. 

The  graph  of  earnings  has  a marked  upward  secular  trend,  stronger  than 
the  secular  trend  of  the  prices  of  stocks.  It  exhibits  both  the  major  and  the 
minor  cycles  quite  distinctly. 

There  is  yet  another  graph  of  railroad  gross  earnings,  which  is  month- 
ly in  character  and  extends  from  March,  1903,  to  July,  1917.  This  graph  shows 
the  gross  earnings  of  "ten  leading  roads"  for  the  period  in  question.  Details 

as  to  the  source  and  nature  of  this  graph  are  given  in  Appendix  A.  This  graph 

A 

has  a well  marked  upward  secular  trend  and  shows  the  major  and  minor  cycles  also. 
A very  pronounced  seasonal  cycle  can  be  noted.  This  seasonal  cycle  moves  some- 
what as  follows:  down  in  February;  up  in  March;  irregularly  upward  during  April, 

May,  June,  and  July;  sharply  up  during  August,  September,  and  October;  and  sharp- 
ly down  during  November,  December,  and  January  of  the  following  year.  The  gross 


-24- 


earnings  are  influenced^  to  move  in  this  way  by  the  conditions  of  farming  and 
cattle  raising.  The  period  of  the  greatest  upward  movement  is  due  to  the  move- 
ment of  the  harvested  crops.  These  cycles,  therefore,  reflect  the  cycles  in  the 
farming  and  cattle  raising  industry. 

The  prices  of  railroad  stocks  and  monthly  gross  earnings  of  ten  lead- 
ing roads  can  only  he  said  to  follow  each  other  in  a general  way.  No  close 
month  to  month  correspondence  can  he  noted,  except  for  the  seasonal  cycles.  The 
panic  of  1907  begins  in  November,  1S06  for  railroad  stocks,  but  it  begins  for 
railroad  gross  earnings  in  October,  1907;  a lag  of  ten  months  is  apparent  here. 

It  may  be  well  at  this  point  to  set  down  some  of  the  more  outstanding 
features  of  the  relation  of  the  general  price  level  of  stocks  with  earnings  and 
dividends.  Only  such  conclusions  as  are  warranted  by  the  data,  with  sufficient 
persistence  to  be  called  probable,  are  set  down. 

Conclusions: 

1.  The  general  price  level  of  stocks,  over  a long  period  of  time, 
bears  a close  relation  to  dividend  payments  and  earnings. 

2.  The  general  price  level  of  stocks  anticipates  the  payments  of  divi- 
dends by  a period  of  from  three  to  nine  months.  If  the  graph  representing  the 
general  price  level  of  stocks  is  placed  alongside  the  graph  representing  dividend 
payments,  a lag  of  from  three  to  nine  months  can  be  noted  in  the  graph  of  divi- 
dend payments.  The  general  price  level  of  stocks  does  not  represent  the  state 

of  business  earnings  to-day,  but  as  traders  believe  the  state  of  these  earnings 
will  be  three  to  nine  months  from  to-day. 

3.  The  same  rate  of  return  for  railroad  shares  and  for  other  shares 
will  mean  a higher  capital  value  for  the  railroad  shares,  generally  speaking. 

That  is  to  say,  that  railroad  shares  are  capitalized  at  a lower  rate  of  return 
than  are  the  other  shares.  The  differences  in  the  rates  of  capitalization  may 
be  regarded  as  a payment  for  a risk  of  some  kind. 


r» 


* 


. 


. 

P* 

. 


« 


* 


. 

* 


, -ft.  ' 

* 


-25- 


4.  The  great  difference  in  the  general  level  of  price  between  railroad 
and  other  shares,  especially  noticeable  during  the  period  1900  to  1914,  was  due 
to  the  higher  rate  of  return  (dividends)  on  the  railroad  shares. 

5.  From  conclusions  number  one  and  four,  it  is  apparent  that  it  is  the 
dividends  which  are  the  closest  influence  upon  the  general  level  of  prices  of 
stocks. 


6.  Since  the  general  price  level  of  stocks  follows  dividend  payments 
very  closely,  it  is  apparent  that  the  general  price  level  of  stocks  is  represen- 
tative of  the  general  condition  of  business  enterprise.  This  argument  rests  on 
the  fact  that  earnings,  and  consequently,  dividends,  are  the  essential  and  dis- 
tinguishing factors  in  connection  with  business  enterprise.  The  reward  of  busi- 
ness enterprise,  of  the  entrepreneur,  is  profits;  it  is  the  receipt  of  these 
profits  that  distinguishes  the  entrepreneur  from  all  other  economic  classes. 
Hence,  if  the  general  price  level  of  stocks  can  be  said  to  follow,  or  to  antici- 
pate, these  profits,  we  are  Justified  in  saying  that  the  general  price  level  of 
stocks  is  representative  of  the  state  of  business  enterprise. 

7.  The  movements  called  "secular  trend”,  "major  cycle",  "minor  cycle", 
and  "seasonal  cycle"  are  not  peculiar  to  the  general  price  level  of  stocks  alone, 
but  also  to  earnings  and  to  dividends  of  corporate  enterprise. 


8.  That  dividends  and  earnings  are^the  final  cause  of  the  condition 
of  business  enterprise.  They  are  but  one  step  in  a long  causal  sequence,  and 
they  are  in  themselves  the  results  of  some  deeper  underlying  causal  nexus. 


, 


« 

« 


A 

. 

•1  ■'  . . 

* 

1 

A 

-26- 


CHAPTER  IV.  TEE  GENERAL  PRICE  LEVEL  PIT  STOCKS  AND  THE  MONE- 
TARY AND  BANKING  INDICES- 

It  is  not  always  wise  to  draw  broad  general  statements  saying  that  the 
state  of  the  monetary  and  hanking  situation  governs  the  condition  of  business  en- 
terprise, or  to  aay  that  the  situation  of  business  enterprise  has  changed  the 
monetary  and  banking  conditions.  Broad,  general  statements  like  these  can  only 
be  made  accurately  after  a thorough  analysis  of  the  situation.  Each  separate 
period  must  be  studied  in  itself  before  an  attempt  is.  made  to  draw  any  general 
conclusions.  The  influence  between  the  two  may  bo  said  to  be  reciprocal,  and  it 
is  altogether  possible  that  a given  condition  in  both  the  business  enterprise  and 
the  monetary  and  banking  situation  might  be  caused  by  other  factors,  and  therefore, 
the  two  situations  may  be  both  effects  of  a given  set  of  proximate  causes.  It  is 
the  purpose  of  this  chapter  to  call  attention  to  the  more  outstanding  relation- 
ships existing  between  the  two,  and  to  set  down  such  conclusions  as  may  seem  war- 
ranted by  the  facts.  The  chart  of  the  index  numbers  of  the  prices  of  railroad 
and  other  stocks  is  to  be  compared  and  correlated  with  the  indices  of  the  monetary 
and  banking  group  of  graphs.  The  monetary  and  banking  group  comprises  the  follow- 
ing indices  which  have  been  plotted  upon  one  chart  under  the  heading  of  "Monetary 
and  Banking  Group": 

Interest  rates 

Monthly  rate  of  demand  loans  (call  money)  at  the  New  York  Stock  Exchange 

Monthly  rate  of  interest  on  four  to  six  months  good  single  name  comner- 
cial  paper 

Monthly  rate  of  interest  on  sixty  to  ninety  day  choice  double  name  com- 
mercial paper 

Average  monthly  rate  of  interest  on  ten  American  Railway  bonds 

Average  monthly  reserves  of  New  York  City  Banks 

Average  monthly  deposits  of  New  York  City  Banks 

Average  monthly  loans  of  New  York  City  Banks 

Total  circulation  of  all  kinds  of  money  in  the  United  States  by  months. 


*•’  ■ *. 


-27- 


The  chart  showing  these  indices  will  he  found  appended  to  thi3  study. 

The  analysis  in  this  chapter  will  be  taken  up  by  movements  which  the  indices  of 
the  general  price  level  of  stocks  and  the  monetary  and  banking  indices  are  ob- 
served to  make.  We  begin  with  a consideration  of  the  secular  trend. 

Secular  Trend: 

With  the  exception  of  the  four  interest  rates,  a very  marked  upward  sec- 
ular trend  can  be  noted  for  all  the  indices.  This  secular  trend  is  the  most 
marked  for  average  monthly  loans  of  New  York  City  Banks  and  for  the  average  month- 
ly deposits  of  New  York  City  Banks.  The  secular  trend  of  these  two  indices  fol- 
lows each  other  very  closely.  This  is,  of  course,  as  would  be  expected  for  the 
bulk  of  the  deposits  of  New  York  City  Banks  are  created  through  the  lending  pro- 
cess. Any  increase  or  decrease  in  the  loans  would  then  be  reflected  in  the  amount 
of  the  deposits.  The  secular  trend  of  the  total  amount  of  all  kinds  of  money  in 
circulation  in  the  United  States,  by  months,  and  the  average  monthly  reserves  of 
the  New  York  City  Banks  is  less  pronounced  than  the  secular  trend  of  the  other  two 
factors,  but,  nevertheless,  it  is  quite  marked,  and  the  rise  is  uniform  throughout 
the  period.  Bank  reserves  follow  the  total  amount  of  money  in  circulation  very 
closely,  because  some  of  this  money  issued  is  suitable  for  use  as  bank  reserves. 

A certain  amount  of  this  legal  tender  finds  its  way  into  bank  reserves  through  the 
operations  of  the  general  processes  of  exchange.  When  the  total  amount  of  circu- 
lating media  is  permanently  increased  the  reserves  of  banks  will  usually  be  in- 
creased a proportionate  amount.  This  process  is  carried  on  by  the  increasing  of 
the  individual  reserve  holdings  of  the  various  banks , and  also  by  increasing  the 
number  of  banks.  The  various  processes  by  which  this  money  reaches  the  reserves 
are  many.  It  may  find  its  my  directly  from  the  government,  or  it  may  find  its 
way  through  the  settlement  of  balances  between  banks,  deposits  and  repayment  of 
loans.  It  is  this  fact  that  accounts  for  the  similarity  of  secular  trend  between 
bank  reserves  and  total  amount  of  money  in  circulation.  A long  time  correspon- 


-28- 


dence  between  these  two  factors,  rather  than  a short  time  correspondence,  is  the 
logical  result. 

It  has  already  been  noted  that  bank  deposits  and  loans  have  a very  much 
greater  secular  trend  than  that  of  total  amount  of  money  in  circulation  and  bank 
reserves.  This  phenomenon  is  due  to  the  fact  that  a bank  only  keeps  a certain 
percentage  of  reserve  against  its  demand  liabilities.  This  percentage  varies  in 
different  localities  and  at  different  times,  but  bankers  in  New  York  have  been  in 
the  habit  of  assigning  twenty-five  per  cent  as  the  proper  ratio  on  the  average. 

Now  if  the  reserves  of  banks  are  doubled,  the  lending  ability  of  these  banks  is 
mors  than  doubled;  it  is  increased  by  an  amount  approximately  four  times  as  great 
as  the  increase  in  reserves.  The  indices  show  that  the  secular  trend  of  loans  and 
deposits  is  approximately  four  times  as  great  as  the  secular  trend  of  the  total 
amount  of  money  and  bank  reserves . This  difference  is  due  to  the  fact  that  loans , 
and  consequently  deposits,  increase  about  four  times  as  fast  as  the  total  quantity 
of  money  in  circulation,  and  consequently  reserves. 

The  sequence  for  this  process  will  be  somewhat  as  follows:  Increase  in 

the  total  amount  of  money  in  circulation;  increase  in  the  amount  of  lawful  money 
in  bank  reserves;  increase  in  the  loans  of  banks;  increase  in  the  deposits  of 
banks.  Thus  it  is  that  a small  increase  in  the  amount  of  money  in  circulation 
will  mean  a very  great  increase  in  the  amount  of  credit.  If  other  things  remain 
equal,  increasing  the  total  amount  of  money  in  circulation  will  serve  to  raise 
prices  by  an  amount  out  of  all  proportion  to  the  new  quantity  of  money  added  to 
the  circulation,  because  this  monetary  addition  means  a much  greater  increase  in 
the  amount  of  credit . 

The  increasing  prices  of  commodities  since  1890  (see  graph  of  commodity 

prices)  is  believed  to  be  due  to  the  fact  that  our  monetary  and  credit  circulation 

% 

has  been  steadily  increased.  The  very  rapid  rise  in  commodity  prices  since  the 
European  War  of  1914  is  due  to  the  unusual  rapidity  with  which  we  increased  the 


-29- 

amount  of  money  and  credit  during  this  period*  This  increase  in  money  came  from 
two  sources  primarily:  the  amount  of  gold  was  increased  in  this  country;  and  a new 
kind  of  money,  Federal  Reserve  Rotes,  was  added  to  our  circulation.  Bank  loans  in- 
creased proportionally  and  a great  increase  in  commodity  prices  was  the  net  result. 
This  is  the  fundamental  explanation  of  the  ''high  cost  of  living”  that  aroused  so 
much  attention  in  1919  and  1920.  This  explanation  rests,  of  course,  upon  the 
quantity  theory  of  money*.  During  a period  of  inflation,  banks  will  extend  credit 
freely  to  business  men.  This  enables  business  men  to  hold  over  supplies  of  goods 
until  a favorable  time  has  arrived  for  marketing  them.  Thus  it  is  that  engrossing 
and  "profiteering”  are  possible  during  a period  of  inflation.  During  a period  of 
deflation  banks  are  not  so  ready  to  extend  credit,  and  often  the  business  man 
finds  that  he  is  not  able  to  obtain  the  credit  necessary  for  him  to  hold  ever 
goods  until  a favorable  marketing  time  has  been  reached.  He  may  even  find  it 
necessary  to  liquidate  at  a very  unfavorable  time.  Further,  in  periods  of  infla- 
tion, the  prices  of  manufactured  goods  often  rise  faster  than  the  prices  that  the 
manufacturer  finds  it  necessary  to  pay  for  his  factors  of  production.  "Profiteer- 
ing”, then,  is  usually  a concomitant  of  a period  of  inflation.  To  prosecute  the 
"profiteer”  is  to  attempt  to  get  rid  of  the  cause  of  a situation  of  high  price  by 
tampering  with  the  effect.  The  cause  is  inflation,  and  it  is  this  fact  that 
should  receive  the  attention  of  those  anxious  to  bring  about  a reduction  in  price. 
The  word  "profiteer”  is  foreign  to  periods  of  deflation  and  low  price. 

From  the  above  comments  it  can  be  seen  readily  that  there  is  a very 
close  connection  between  the  state  of  business  enterprise  and  some  of  the  monetary 
and  banking  factors. 

The  graphs  of  the  four  rates  of  interest  exhibit  no  secular  trend.  The 

♦For  a complete  exposition  of  the  quantity  theory  of  money  see:  Fisher,  Irving, 

The  Purchasing  Power  of  Money. 


-30- 


graph  of  the  average  rate  of  interest  on  ten  American  railway  bonds,  though  it  has 
no  clearly  defined  secular  trend,  is  "bowed”  downward  quite  symmetrically.  That 
is  to  say,  the  investment  rate  of  interest  declined  gradually  from  1890  to  about 
1903,  after  which  period  it  rose  gradually  to  1918.  Both  the  decline  and  the  sub- 
sequent rise  take  the  form  of  curves.  The  other  rates  of  interest,  call  loans, 
sixty  to  ninety  day  paper,  and  four  to  six  months  paper,  exhibit  many  other  move- 
ments, but  no  secular  trend.  This  fact  may  indicate  one  of  several  things:  the 
productiveness  of  business  enterprise  has  remained  stationary,  and  consequently, 
the  returns  to  the  various  factors  of  production  has  remained  unchanged;  business 
enterprise  may  have  decreased  in  productiveness  and  the  supply  of  loanable  capi- 
tal decreased  at  the  same  rate;  or  finally,  business  enterprise  has  increased  in 
productiveness,  and  the  supply  of  loanable  funds  has  likewise  increased.  The 
truth  of  the  matter  is  believed  to  lie  with  the  latter  case.  There  is  ample  rea- 
son to  believe  that  business  enterprise  has  increased  in  productiveness.  In  the 
first  place,  this  fact  is  manifest  from  the  increasing  secular  trend  of  the  earn- 
ings and  dividends  group  of  factors.  In  the  second  place,  the  rewards  paid  to 
other  factors,  such  as  rent  andwage3,  have  increased.  If,  therefore,  business 
enterprise  has  increased  in  productivity,  and  the  interest  rates  have  remained 
relatively  the  same  over  a long  period  of  time,  we  must  conclude  that  the  supply 
of  loanable  capital  funds  has  undergone  an  increase.  This  fact  has  been  used  by 
the  socialists  for  some  time.  They  say  that  the  increasing  supply  of  capital  has 
given  rise  to  the  nationalistic  and  imperialistic  movements  in  history.  New  colo- 
nies are  exploited,  they  say,  in  order  that  the  demand  for  loanable  fund9  may,  in 
some  measure,  be  made  to  keep  pace  with  the  increasing  supply.  The  "national  im- 
pulse", therefore,  is  economic  in  its  origin,  according  to  the  socialists*.  In 

♦The  tendency  to  interpret  history  in  this  manner  has  been  in  vogue  since  the 
time  of  Karl  Marx.  It  has  been  called  "the  economic  interpretation  of  history". 
Cf.  Marx,  Karl,  Das  Kapital . 


-31- 


this  investigation,  we  are  not  interested  primarily  in  an  interpretation  of  his- 
torical events  -unless  they  have  some  very  definite  bearing  -upon  the  matter  in  hand. 
Attention  is  called  to  this  point  to  illustrate  just  what  use  has  been  made  of  this 
type  of  economic  phenomena  by  those  people  who  are  interested  in  the  change  of  the 
economic  structure  of  the  world. 

The  Major  Cycles: 

The  major  cycle  is  not  apparent  in  any  of  the  graphs  of  interest  rates. 
The  movements  of  the  investment  rate,  mentioned  in  a previous  paragraph  are  cycli- 
cal in  character.  That  is,  the  rate  moves  downward  over  a period  of  years  and 
then  again  turns  upward.  This  is  a cyclical  movement  of  long  duration,  but  it  is 
not  analagous  to  the  major  cycle  referred  to  in  chapter  II.  The  major  cycle  is 
present  in  the  movements  of  the  total  quantity  of  money  in  circulation  or  bank  re- 
serves, but  it  is  not  so  apparent  as  it  is  for  other  indices.  At  certain  periods, 
the  movements  of  the  index  of  bank  reserves  is  above  that  of  the  line  of  the  total 
amount  of  money  in  circulation.  luring  the  period  1890  to  1897,  the  movements  of 
the  bank  reserves  are  usually  below  the  line  of  the  movements  of  total  quantity  of 
money  in  circulation.  During  the  period  1897  to  1914,  the  opposite  is  true.  The 
major  cycle  is  apparent  in  the  movements  of  bank  loans  and  bank  deposits.  These 
two  lines  appear  to  move  in  three  "steps'1 . The  first  step  can  be  noticed  to  begin 
in  1890  and  end  in  November,  1896.  The  second  begins  in  December,  1896,  and  ends 
in  November,  1903.  The  third  begins  in  November,  1903,  and  ends  in  1914.  The 
characteristic  of  these  three  movements  i£  the  fact  that  each  new  step  appears  to 
begin  its  upward  movement  with  a greater  intensity,  and  to  slack  off  gradually 
towards  the  end.  The  movement  can  be  called  cyclical,  however. 

The  monetary  and  banking  group  of  indices  does  not  so  clearly  exhibit 
the  major  cycle  that  the  indices  of  the  prices  of  stocks  show.  This  fact  may_ mean 
that  7/e  must  look  to  other  sources  for  an  explanation  of  the  major  cycle  movement 
in  the  general  price  level  of  stocks.  It  is  believed  that  the  total  quantity  of 


-32- 


money  in  circulation,  in  the  last  analysis,  is  the  ultimate  determinant  of  all 
the  other  factors.  The  sequence  is  as  follows:  increasing  amount  of  money  in 

circulation;  increasing  "bank  reserves;  lower  interest  rates;  increasing  amount  of 
loans;  increasing  amount  of  bank  deposits.  Loans  and  bank  deposits  will  increase 
up  to  a certain  amount,  that  is,  up  to  the  safety  point  of  the  reserves.  Then 
loans  and  deposits  will  not  continue  to  increase  without  further  increase  in  the 
quantity  of  money  in  circulation.  Although  this  sequence  might  be  quite  clear  and 
convincing,  it  does  not  show  that  there  may  not  be  a cyclical  movement  in  any  one 
or  all  of  the  factors.  Why  does  not  the  amount  of  money  in  circulation  show  the 
major  cycle?  Is  it  a certainty  that  bank  loans  will  increase  if  the  rate  of  in- 
terest is  lowered?  The  answer  to  this  problem  of  the  major  cycle  cannot  be  given 
here* 

The  Minor  Cycles 

A minor  cycle,  of  somewhat  irregular  character,  can  be  noted  for  all  the 
monetary  and  banking  factors  with  the  exception  of  the  total  amount  of  money  in 
circulation  and  the  interest  rates.  The  total  amount  of  money  in  circulation  has 
a fairly  uniform  upward  secular  trend,  and  monthly  variation.  This  graph  takes  a 
decided  dip  during  the  fall  of  the  year  1907,  but  recovers  its  normal  trend  before 
this  year  is  over.  This  indicates  that  there  was  a decided  contraction  in  the 
amount  of  money  in  circulation.  It  is  interesting  to  note  that  this  contraction 
took  place  shortly  after  the  panic  of  1907  began.  This  contraction  cannot  be  said 
to  be  due  to  the  exporting  of  gold,  for  at  this  time  gold  was  being  engaged  for 
importation,  and  the  actual  importations  began  in  September.  The  cause  of  thi3 
contraction  in  the  amount  of  money  in  circulation  may  be  ascribed  to  two  reasons: 
the  hoarding  of  gold  in  the  United  States  Treasury  and  the  decline  in  the  circu~ 
lation  of  National  Bank  Notes.  In  the  summer  and  fall  of  1914  this  graph  makes 
a small  dip  followed  immediately  by  a rapid  rise  and  subsequent  decline  towards 
the  end  of  the  year.  The  first  dip  culminates  in  the  same  month  that  the  New 


- - 


. 

. 


: 


-33- 


York  Stock  Exchange  closed.  The  first  decline  was  in  all  probability  occasioned 
by  large  exports  of  gold  to  Europe  which  took  place  at  this  time.  The  subsequent 
rise  was  doubtless  occasioned  by  the  extension  of  the  limits  -upon  the  issue  of 
emergency  currency  which  took  place  in  August.  The  subsequent  decline  marks  the 
retirement  of  some  of  this  emergency  currency.  These  two  irregular  movements  had 
no  visible  effect  upon  the  general  price  level  of  stocks,  and  are  easily  under- 
stood in  the  light  of  the  events  that  transpired  at  the  time. 

Interest  rates,  also,  exhibit  no  minor  cycle.  There  are  a large  number 
of  smaller  movements,  some  of  them  cyclical  in  character,  but  the  elements  of  the 
minor  cycle  are  lacking  in  this  group.  It  may  be  possible  to  attribute  this  lack 
to  the  fact  that  there  are  certain  correctives  of  the  interest  rate  that  operate 
to  prevent  a movement  of  this  character.  The  chief  among  these  correctives  may 
be  said  to  lie  in  the  nature  of  the  demand  and  supply  for  loanable  funds.  Were 
the  interest  rate  to  persist  at  a low  rate  for  a certain  period  of  time,  as  it 
must  do  in  some  phases  of  the  minor  cycle,  it  would  be  a very  propitious  time  for 
enterprisers  to  extend  their  plant  and  to  invest  a part  of  their  replacement  fund. 
This,  of  course,  would  tend  to  raise  the  rate  of  interest.  Were  the  interest  rate 
to  persist  at  a relatively  high  rate  for  a certain  period  of  time,  as  it  must  do 
in  some  phases  of  the  minor  cycle,  enterprisers  would  not  be  anxious  to  extend 
their  plants  and  to  reinvest  a part  of  the  replacement  fund.  On  the  other  side 
of  the  problem,  a persistently  low  rate  of  interest  would  serve  to  act  as  a check 
on  savings  and  investment  and  to  the  creation  of  loanable  funds  in  the  shape  of 
credit  by  banks.  This  also  would  serve  to  raise  the  general  rate  of  interest. 

On  the  other  hand,  a persistently  high  rate  would  serve  to  increase  savings  and 
the  loanable  funds  by  banks  and  private  individuals,  which  would  then  tend  to 
operate  so  as  to  lower  the  rate  of  return.  Other  correctives  may  be  found  in  the 
international  flow  of  capital,  in  the  establishment  of  new  banking  institutions 


. „ 

' 


K . A 


k V. 


' ■ • 


' ■ 


' 


■ 


• V 


. 

. 


• v«'  • 


suing  rise  lasts  until  July,  1909.  A short  period  of  depression  follows  this 
movement  and  lasts  until  December,  1911.  The  following  rise  culminates  February, 
1912.  A period  of  depression  follows  this  and  lasts  until  December,  1913.  This 
series  i3  discontinued  in  the  following  year,  due  to  the  inauguration  of  the  Fed- 
eral Reserve  System,  which  made  further  figures,  homogeneous  with  those  which  pre- 
ceded them,  Impossible  to  obtain. 

A comparison  between  the  minor  cycles  of  this  group  and  the  minor  cycles 
of  the  movements  of  stock  prices  reveals  the  fact  that  there  is  evidence  of  a per- 
sistent connection  between  these  two  cycles.  They  may  frequently  be  found  to  co- 
incide; especially  is  this  fact  noticeable  around  the  period  of  the  panic  of  1907, 
but  the  similarity  cannot  be  said  to  be  entirely  regular.  Often  the  movements  of 
this  cycle  for  average  bank  reserves  is  quite  obscure  in  many  places;  it  is  no 
clearly  defined  movement  as  is  this  same  movement  for  stock  prices. 

Although  the  correspondence  is  net  as  clearly  marked  as  was  the  case  of 
earnings  and  dividends,  it  is  still  well  defined  enough  to  warrant  the  conclusion 
that  there  is  some  connection  between  the  general  price  level  of  stocks  and  bank 
reserves.  In  periods  when  the  general  price  level  of  stocks  rises  or  falls,  a 
similar  movement  can  be  noted  in  the  case  of  bank  reserves.  Bank  reserves,  how- 
ever, start  their  movements  a considerable  period  in  advance  of  stock  prices. 

This  period  of  advance  varies  from  about  three  months  to  a year.  This  fact  might 
possibly  lead  to  the  conclusion  that  increased  banking  reserves  made  possible  an 
increase  in  the  volume  of  business.  The  complete  analysis  of  this  sequence  must 
be  reserved  until  the  analysis  of  the  monetary  and  banking  factors  has  been  fin- 
ished. 

Average  loans  of  Banks  and  Average  Deposits  of  Banks :- 

These  two  factors  follow  each  other  so  very  closely  that  they  may  be 
considered  together  as  far  as  this  movement  is  concerned.  The  minor  cyclical 
movement  is  quite  pronounced  as  far  as  these  two  factors  are  concerned.  These 


* 


; .V  V ■ 


- 

' 

• 

* 

. 

‘ 

. 

■ 

! ' • - 

, 

A 


-36 


movements  are  as  follows:  From  January,  1890,  to  June,  1891,  the  phase  of  the 

minor  cycle  is  down  for  these  factors.  A short  rise  immediately  follows,  lasting 
until  June,  1892.  After  this  date  values  fall  again  until  August,  1893.  The  fol- 
lowing rise  lasts  until  August,  1895,  after  which  date  these  indices  decline  until 
October,  1896.  After  this  period  a reaction  upward  sets  in  which  lasts  until 
June,  1899,  when  a decline  sets  in  that  ends  November,  1903.  The  following  rise 
persists  until  August,  1905,  when  the  following  phase  declines  until  the  date 
January,  1908,  is  reached.  This  rise  ends  in  July,  1909.  The  ensuing  fall  lasts 
until  October,  1910.  The  date  August,  1912,  marks  the  end  of  the  subsequent  rise, 
and  the  decline  which  follows  again  ends  in  November,  1913.  The  series  is  dis- 
continued in  the  following  year,  because  it  was  no  longer  possible  to  obtain  a 
homogeneous  series  for  these  indices  without  undue  difficulty. 

This  minor  cycle  here  is  more  clearly  marked  than  the  minor  cycle  ex- 
hibited by  the  reserves  of  banks  .and  an  examination  of  the  graphs  of  these  three 
factors  will  show  that  there  is  a rough  general  correspondence  between  them.  This 
is,  of  course,  as  would  be  expected,  since  it  is  evident  that  there  is  a clearly 
defined  causal  sequence  between  these  factors. 

It  is  easier  to  compare  the  movements  of  the  minor  cycle  of  the  bank 
loans  and  the  bank  deposits  with  the  movements  of  the  minor  cycle  of  stock  prices 
than  any  other  of  the  monetary  and  banking  indices.  This  is  due,  primarily,  to 
the  fact  that  the  minor  cycle  is  more  clearly  marked  and  is  more  persistent  than 
in  the  case  with  bank  reserves.  During  many  of  the  movements  of  the  minor  cycle 
for  these  two  indices,  a correspondence  can  be  noted,  but  there  are  some  periods 
during  which  time  there  is  no  correspondence  and  correlation.  Also  rises  and  de- 
clines, when  a correspondence  can  be  noted,  do  not  always  begin  and  end  at  the 
same  time.  All  that  can  be  affirmed  is  a rough  general  correspondence  during 
most  periods.  In  spite  of  these  minor  differences,  and  lack  of  correspondence  at 
certain  times,  there  is  a decided  and  persistent  connection  between  these  indices 


. 


. 


‘ 

* 

- 

• 

• • ■ 


* 


-37- 

and  the  general  level  of  prices  of  stocks.  An  examination  of  the  graphs  will  show 
clearly  that  this  connection  is  a real  and  definite  one. 

For  the  most  part,  the  minor  cycles  begin  their  movements  at  approximate 
ly  the  same  time.  This  indicates  that  bank  loans  and  bank  deposits  are  a concomi- 
tant with  the  state  of  business  enterprise.  From  what  has  already  been  said  of 
the  causal  sequence  between  these  various  movements,  it  is  evident  an  increased 
amount  of  bank  reserves  finds  its  first  effect  in  lowering  the  rates  of  interest. 
Tiiis  makes  it  an  attractive  thing  for  business  enterprisers  to  enlarge  their 
plants,  horizontally  and  vertically,  and  to  expand  the  volume  of  business  that  is 
being  done.  The  extension  and  increase  in  credit  facilities  also  increases  the 
profitableness  of  business  enterprise*.  From  a point  of  view  of  economic  theory 
credit  extension  may  be  a source  of  profits  to  business  enterprisers**.  Conse- 
quently, we  would  expect  to  find  a higher  general  level  of  prices  during  a period 
of  credit  expansion  than  we  would  during  a period  of  normal  equilibrium.  Business 
enterprisers,  to  continue  the  sequence,  find  it  attractive  to  take  advantage  of 
the  lowered  rate  of  interest  to  extend  their  plants;  their  profits  are  increased; 
and  we  find  business  enterprise  carried  on  a higher  rate  of  profits  for  the  time. 
The  general  price  level  of  stocks  senses  this  condition  nicely  and  we  have  a high- 
er general  level  of  prices  of  stocks  as  a direct  result  of  increased  bank  reserves 
working  through  a lowered  rate  of  interest,  and  an  increased  amount  of  bank  loans 
and  deposits. 

This  brings  us  back  to  the  question  of  increased  bank  reserves.  The 
source  of  this  increase  must  be  considered  before  the  sequence  is  complete.  It 


♦Mitchell,  1.  C.,  A History  of  the  Greenbacks.  Fisher,  Irving,  The  Purchasing 
Power  of  Money. 

**This  statement  is  especially  clear  if  the  marginal  productivity  theory  of  dis- 
tribution is  considered.  An  extension  of  credit  facilities,  lowering  of  the  rate 
of  interest,  and  the  accompanying  changes  in  the  ecnnomic  fabric,  are  disturbances 
to  the  normal  equilibrium,  which  may  be  a source  of  profits.  Seager,  in  his 
Principles  of  Economics,  illustrates  this  fact  quite  clearly.  However,  increasing 

credit  facilities  are  a possible  source  of  business  profits  from  practically  all 


••  • • 


>x. 


. 


. 


. 


w 

* 


-38- 

has  already  been  pointed  out  in  this  chapter  that  an  increased  volume  of  money 
will  be  accompanied  by  an  increased  amount  of  money  available  for  bank  reserves. 

A part  of  this  increased  purchasing  power  is  in  the  form  of  legal  tender  and 
eventually  finds  itw  way  into  the  vaults  of  the  banks.  This  has  clearly  been  the 
case  during  the  period  at  issue  as  a glance  at  the  graphs  will  reveal.  One  of  the 
important  proximate  occasions  of  a higher  general  price  level  of  stocks,  which 
means  a putative  higher  level  of  business  profits  and  enterprise,  is  the  increase 
in  the  total  amount  of  money  in  circulation. 

Economists  have  long  adhered  to  this  belief,  partly  from  a priori  and 
partly  from  inductive  reasoning.  This  fact  is  here  firmly  established  both  sta- 
tistically and  graphically.  There  is  one  point,  however,  in  this  connection  which 
is  not  quite  clear.  Does  the  increasing  quantity  of  money  and  the  consequent  ex- 
pansion in  credit  cause  the  prices  of  stocks  to  be  quoted  in  larger  terms  due  to 
the  decreased  purchasing  power  of  money,  or  does  the  increasing  quantity  of  money, 
and  the  consequent  increasing  supply  of  bank  credit  enable  business  enterprise  to 
become  more  profitable  and  in  this  manner  enhance  the  capital  value  of  the  shares? 
This  problem  can  be  stated  differently  by  asking  whether  the  increased  value  of 
shares  is  merely  the  reciprocal  of  a decreased  dollar  or  whether  it  is  a result  of 
increased  earnings.  Does  increasing  the  quantity  of  money  operate  to  increase  the 
value  of  shares  directly  or  through  the  medium  of  earnings?  For  a final  answer 
to  this  problem,  a great  deal  more  must  be  done  in  the  way  of  analysis  before  the 
final  answer  can  be  given.  The  other  factors  must  first  be  compared  with  the 
general  price  level  of  stocks  before  a final  solution  is  attempted.  There  is 
this  much,  however,  in  favor  of  saying  that  the  increased  quantity  of  money  raises 
the  value  of  shares  by  making  business  enterprise  more  profitable;  that  is  the 

the  different  distributive  theories  which  have  current  acceptance  to-day. 

4 


-39- 


fact  of  the  cyclical  movements  of  the  value  of  shares,  and  the  absence  of  any 
such  cyclical  movement  in  the  total  quantity  of  money  in  circulation.  Although 
the  quantity  of  money  exhibits  no  minor  cycle,  the  bank  loans  and  deposits  do. 

This  might  serve  to  show  that  the  quantity  theory  of  money  was  operating  through 
this  medium  to  cause  the  values  of  shares  to  be  quoted  in  larger  terms,  or  in 
terms  of  a depreciated  purchasing  medium.  The  swings  of  the  minor  cycles  in 
stocks,  and  those  of  the  bank  loans  and  deposits  do  not  serve  to  bear  out  this 
contention*  The  recessions  from  periods  of  high  prices  of  stocks,  while  often 
accompanied  by  recessions  in  the  quantity  of  credit,  bear  but  a small  quantitative 
relation  to  these  recessions  in  credit.  The  weight  of  the  evidence,  as  an  exami- 
nation of  the  graphs  will  reveal,  serves  to  bear  out  the  thesis  that  the  minor 
cyclical  swing  in  prices  of  stocks  is  caused  by  the  greater  earning  ability  of 
business  enterprise  during  periods  of  credit  inflation.  This  conclusion  cannot 
as  yet  be  stated  with  any  definiteness  until  more  work  of  analysis  has  been  com- 
pleted, but  it  is  quite  evident  that  this  theory  is  close  to  the  truth  from  the 
analysis  already  made. 

In  connection  with  the  minor  cycle  attention  must  be  finally  drawn  to 
the  interest  rates  again*  The  fact  that  the  interest  rates  show  no  cyclical 
trend  corresponding  to  the  minor  cycle  has  already  been  noted.  This  fact  does 
not  serve  to  destroy  the  sequence  that  has  been  drawn;  namely,  from  increased 
bank  reserves  through  decreased  interest  rates,  then  through  increased  bank  loans 
and  deposits  to  finally  a more  profitable  state  of  business  enterprise  and  a con- 
sequent higher  evaluation  of  the  shares  in  business  enterprise.  Interest  rates 
do  not  operate  in  cyclical  swings  as  do  the  other  factors  because  they  are  not 
absolute  amounts  as  these  other  factors  are,  but  relative  amounts.  They  are  per- 
centages, and  as  such,  serve  as  media  through  which  these  other  factors  can  oper- 
ate. This  fact  of  the  absence  of  the  cyclical  swings  is  further  explained  by  the 


-40- 


very  small  movements  which  interest  rates  make.  The  movement  is  really  too  small 
to  show  on  a graph  of  this  scale)  the  minor  cycle.  A careful  examination  of  the 
rate  of  interest  for  call  loans  at  the  stock  exchange  will  show  that  the  rates 
are  very  generally  low  when  the  bank  reserves  are  high  and  loans  are  expanding, 
but  that  towards  the  end  of  the  cycle  of  loan  expansion,  the  rate  of  interest 
begins  to  move  at  a geometrically  increasing  ratio.  As  the  banks  approach  the 
period  when  they  become  "loaned  up",  the  interest  rate  will  advance  rapidly.  The 
opposite  effect  is  noted  when  bank  loans  are  contracting.  A low  rate,  therefore, 
will  persist  as  long  as  banks  are  desirous  of  expanding  their  loans,  and  as  soon 
as  this  period  of  expansion  approaches  its  end  the  rate  begins  to  move  upward 
rapidly.  A high  rate  will  persist  as  long  as  bankers  do  not  feel  that  further 
expansion  is  either  wise  or  profitable.  This  fact  may  be  as  has  already  been 
indicated  or  it  may  lie  in  certain  psychological  factors  that  do  not  make  them- 
selves quite  evident.  Perhaps  the  interest  rate3  are  further  complicated  by 
forces  which  are  not  here  indicated.  However,  their  movements  may  be  observed 
to  bear  out  the  conclusion  of  a connection  between  the  cyclical  swings  of  the 
prices  of  stocks  and  of  the  monetary  and  banking  factors.  The  fact  that  the 
swings  are  not  of  the  same  cyclical  character  does  not  warrant  us  in  throwing  out 
this  conclusion  altogether,  for  the  swings  are  of  such  a nature  as  to  affirm  this 
general  conclusion.  An  examination  in  some  detail  of  these  two  indices  will 
serve  to  bear  out  these  contentions. 

Movements  of  Shorter  Duration  than  the  Minor  Cycle 

The  movements  of  a shorter  duration  than  the  minor  cycle,  which  both 
the  index  numbers  of  the  prices  of  stocks  and  the  monetary  and  banking  factors 
make,  are  of  two  kinds:  a seasonal  variation  and  a month  to  month  variation.  The 
seasonal  variation  is  cyclical  in  character.  This  cyclical  character  of  the  sea- 
sonal variation  is  more  clearly  marked  in  the  case  of  the  monetary  and  banking 
tactors  than  it  is  in  the  case  of  the  indices  of  stock  prices.  The  name  "season- 


-41- 


al  cycle"  will  be  applied  to  it* 

The  Seasonal  Cycle;- 

The  seasonal  cycle  in  the  case  of  the  monetary  and  banking  factors  is  a 
movement,  quite  persistent,  that  takes  place  in  the  fall  of  the  year,  especially 
during  the  months  Wf-  July  to  January  inclusive.  This  i3  the  period  usually  de- 

t\ 

scribed  in  the  current  financial  journals  as  the  "crop  moving  period",  or  harvest 
season.  During  the  early  months  of  this  period,  July  through  November,  bank  re- 
serves, loans,  and  deposits  decline  quite  rapidly,  and  interest  rates  undergo  a 
marked  and  rapid  rise.  During  the  month  of  December,  a decided  reaction  can  be 
noticed  in  declining  interest  rates,  increasing  bank  reserves,  loans  and  deposits. 
These  changes  are  due  to  the  fact  that  the  country  banks  are  withdrawing  their 
balances  from  out  of  the  New  York  City  Banks  to  assist  the  farmers  of  the  West  and 
Middle  West  in  harvesting  and  moving  their  crops.  This  withdrawal  of  funds  acts 
in  the  first  place  to  deplete  the  reserves  of  the  New  York  City  banks.  This  is, 
of  course,  followed  by  the  usual  rising  interest  rates  and  decreased  loans  and  de- 
posits. Towards  the  end  of  November  and  December,  the  farmers  are  being  paid  for 
the  crops  which  have  now  been  harvested,  moved,  and  sold.  The  farmer’s  balances 
in  the  country  banks  are  increasing. the  country  banks  consequently  increase  their 
deposits  in  the  New  York  City  Banks.  This  operates  to  increase  the  reserves  of 
the  New  York  City  Banks  and  the  interest  rates  decline,  and  loans  and  discounts 
increase.  This  description  does  not  fit  the  entire  period  compassed  by  this 
study,  but  more  particularly  the  period  up  to  the  year  1915.  Data  is  lacking  for 
bank  loans,  reserves,  and  deposits  after  this  period,  but  the  interest  rates  show 
clearly  that  the  marked  seasonal  variation  is  absent  from  this  year  on.  This  is 
largely  due  to  the  changes  wrought  by  the  Federal  Reserve  System. 

The  index  numbers  of  the  prices  of  stocks  show  this  movement  also,  but 
not  so  regularly  nor  as  clearly  as  the  monetary  and  banking  factors  do.  The  fa£t 

that  the  general  price  level  of  stocks  shows  the  same  type  of  a seasonal  varia- 


-42- 


tion  as  does  the  monetary  and  banking  factors  indicates  that  there  may  be  some 
kind  of  a causal  relation  between  these  two  groups.  We  have  already  seen  the 
forces  at  work  leading  to  the  seasonal  variation  in  the  case  of  the  monetary  and 
banking  factors.  Traders  in  stocks  are  not  able  to  secure  the  credit  necessary 
to  carry  their  shares,  and  they  are  often  forced  to  liquidate  them,  when  bank 
reserves  are  low  and  the  lending  facilities  of  the  banks  are  being  taxed.  Thus 
it  is  that  the  seasonal  variation  or  cycles  in  the  monetary  and  banking  factors 
are  the  immediate  occasion  of  the  seasonal  cycles  in  the  case  of  the  indices  of 
the  prices  of  stocks.  During  the  fall  of  the  year,  for  the  majority  of  the  years 
up  to  1915,  a decline  can  be  noted  in  the  prices  of  both  the  railroad  and  the 
other  stocks.  This  decline  usually  begins  at  a slightly  later  time  than  the  de- 
cline in  the  monetary  and  banking  factors.  Often  it  is  not  manifested  by  an  ac- 
tual decline,  but  in  a slackening  in  an  otherwise  rapid  rise  in  the  prices  of 
stocks. 

The  fact  that  this  seasonal  cycle  is  not  as  regular  in  the  prices  of 
stocks  as  for  the  monetary  and  banking  factors  indicates  that  there  are  often 
stronger  forces  operating  on  the  general  price  level  of  stocks  than  the  monetary 
and  banking  factors,  or  that  the  force  of  monetary  and  credit  stringency  is  not 
powerful  enough  to  cause  an  appreciable  general  reaction  in  the  prices  of  stocks. 
The  absence  of  this  correlation  during  any  particular  years  does  not  operate  to 
destroy  the  fact  of  a causal  relation  between  these  two  groups.  There  is  the 
seasonal  variation  in  the  prices  of  both  groups  of  stocks  in  all  but  the  follow- 
ing years:  1900,  1908,  1909.  After  1915  the  phenomena  of  the  seasonal  variation 
is  absent  for  both  groups  of  factors. 

The  causal  sequence  between  the  seasonal  cycles  in  the  case  of  the 
prices  of  3tocks  and  the  monetary  and  banking  factors  is  as  follows:  Country 

banks  withdraw  funds  from  their  New  York  City  correspondents  for  the  purpose  of 
harvesting,  and  moving  the  crops.  This  causes  a decline  in  the  Hew  York  City 


> 


* 


. 


* 


' 


- 


Ir 


-43- 

Bank*  s reserves,  which  is  followed  by  a rise  in  the  rate  of  interest.  Stock  tra- 
ders are  not  able  to  obtain  funds  as  easily  as  formerly,  or  they  cannot  get  the 
funds  or  credit  to  carry  certain  operations  through  and  are  forced  to  liquidate 
their  holdings.  Potential  purchasers  are  discouraged  from  buying,  and  the  demand 
side  of  the  market  is  weakened.  This  causes  a drop  in  prices  of  stocks  generally. 
After  the  crops  have  been  moved  and  sold,  the  country  banks  begin  to  increase 
their  deposits  in  the  New  York  City  Banks,  and  the  interest  rate  falls.  This  aids 
the  demand  side  of  the  market  for  stocks,  and  is  reflected  by  a general  recovery 
in  the  prices  of  stocks.  Thus  it  is  that  the  monetary  and  banking  factors  exer- 
cise a very  powerful  effect  upon  the  prices  of  stocks.  They  are  net  the  final  or 
the  ultimate  cause,  they  may  not  even  be  the  cause,  but  they  are  one  step  in  a 
long  causal  sequence  and  it  is  through  them  that  the  underlying  causes  work.  The 
change  in  the  banking  system  that  began  to  work  itself  out  in  1S15,  did  away  with 
this  seasonal  variation  for  both  groups  of  phenomena  very  largely.  This  further 
substantiates  the  fact  that  the  monetary  and  banking  factors  are  an  essential  link 
in  this  causal  chain. 

Month  to  Month  Variation?- 

A very  careful  examination  of  the  graphs  of  the  monetary  and  banking 

factors  and  the  indices  of  the  general  price  level  of  stocks  shows  that  there  is 

no  regular  relation  between  the  two.  Now  it  may  be  often  possible . that  a monthly 

rise  or  decline  in  the  general  price  level  of  stocks  may  be  due  to  some  factors 

that  have  altered  monetary  and  banking  conditions  so  as  to  assist  in  bringing  this 

about,  but  we  search  in  vain  for  any  persistent  connection  that  will  give  us  a 

general  rule  like  those  which  we  will  be  able  to  formulate  for  the  other  movements. 

VJhile  we  may  not  be  able  to  say  that  there  is  no  causal  sequence  between  these 

two  groups  of  phenomena,  with  relation  to  the  month  to  month  variation,  we  can 

say  that  the  evidence  as  revealed  by  the  graphs  is  against  any  such  assumption, 

% 

and  for  this  reason  the  assumption  of  causal  sequence  for  this  movement  will  not 


*- 


* 


-44- 


be  made. 

The  next  step,  and  the  final  one,  in  this  connection,  is  to  bring  these 
stray  correlations  together  in  a series  of  general  conclusions  which  seem  to  be 
warranted  by  the  facts. 

Conclusions:  - 

1.  That  the  movements  known  as  secular  trend,  major  cycle,  minor  cycle, 
and  seasonal  cycle  are  not  peculiar  to  the  general  price  level  of  stocks  alone, 
but  find  their  counterpart  also  in  the  monetary  and  banking  factors.  The  close 
similarity  between  these  two  groups  in  respect  to  these  movements  indicates  that 
there  may  be  some  causal  relation  between  the  groups. 

2.  That  this  causal  relation  is  believed  to  come  about  in  three  ways: 

(a)  Through  the  operation  of  the  quantitative  law  (quantity  theory  of  money). 
An  increasing  amount  of  money  and  credit  reduces  the  purchasing  power  of  money  anc 
credit.  The  prices  of  stocks,  since  they  are  measured  by  a diminished  unit,  are 
quoted  then  in  a larger  number  of  units  of  purchasing  power,  and  thus  the  general 
price  level  of  stocks  is  raised.  A decreasing  quantity  of  money  and  credit  would 
be  followed  by  a decreasing  general  price  level  of  stocks. 

(b)  Through  the  fact  that  a changing  quantity  of  money  alters  the  profit 
making  possibilities  of  business  enterprise.  An  increasing  quantity  of  money 
disturbs  the  normal  equilibrium  of  production  by  the  fact  that  the  prices  of  some 
goods  to  rise  faster  than  others;  by  the  fact  that  the  prices  of  finished  goods 
are  usually  higher  than,  the  pricss  paid  for  the  production  goods  (they  are  sold 
at  a later  date,  and  the  price  level  will  have  risen  during  this  period);  and, 
finally,  by  the  fact  that  enterprisers  are  able  to  take  advantage  of  these  price 
differentials  to  increase  their  profits.  A decreasing  quantity  of  money  will  be 
accompanied  by  an  opposite  series  of  effects. 

(c)  Through  the  fact  that  an  increasing  or  decreasing  supply  cf  loanable 
bank  funds  increases  or  decreases  the  ability  of  traders  on  the  stock  exchange  to 


. 

; 1 


* 

* 


-45- 


hold.  or  to  purchase  stock.  Changes  in  the  supply  of  credit  in  this  manner  affect 
Tooth  the  supply  and  the  demand  side  of  the  market  for  securities.  An  increasing 
supply  of  available  funds  will  strengthen  both  the  supply  side  and  the  demand 
side  of  the  market  by  making  it  easier  for  owners  of  stock  to  hold  their  shares 
and  thus  strengthening  or  raising  the  level  of  the  supply,  and  also  by  furnishing 
prospective  purchasers  with  the  means  to  carry  their  plans  into  effect  and  thus 
strengthening,  or  raising  the  level  of  the  demand  side  of  the  market.  Increasing 
funds  in  this  manner  also  enables  "short"  traders  to  work  more  effectively  and 
thus  has  a tendency  to  raise  the  general  level  of  the  prices  of  stocks  all  around. 
Decreasing  the  supply  of  loanable  bank  funds  has  just  the  opposite  effect  to  that 
already  noted. 

3.  That  the  increasing  secular  trend  of  the  general  price  level  of 
stocks  is  believed  to  be  due  primarily  to  the  operation  of  the  quantitative  law, 
and  secondarily  to  the  fact  that  an  increasing  quantity  of  money  has  enabled  busi- 
ness enterprise  to  become  more  profitable.  The  increasing  secular  trend  of  the 
earnings  and  dividends  factors  is  believed  to  be  due  to  the  same  influences  in  the 
order  named. 

4.  That  the  major  cycles  cannot  be  accounted  for  with  the  same  precision 
which  it  is  possible  to  employ  in  the  case  of  the  other  movements,  since  they  are 
not  so  clearly  marked  on  the  monetary  and  banking  factors.  They  are,  however,  be- 
lieved to  be  induced  by  the  operation  of  the  quantitative  law  and  the  fact  that 
the  increasing  quantity  of  money  and  credit  has  made  business  enterprise  more 
profitable.  It  cannot  be  urged  in  this  connection  that  one  factor  is  any  more  po- 
tent than  the  other.  The  movement  is  a cyclical  one  because  it  is  of  the  nature 
of  changes  of  this  sort  to  work  out  in  a somewhat  irregular  fashion.  That  is  to 
say,  rises  in  prices,  whether  they  be  due  to  one  cause  or  to  another,  overreach 
themselves,  and  are  compelled  to  drop  back.  This  is  sufficient  to  cause  a move- 
ment of  the  character  of  the  major  cycle. 


~ 

. 


' 


. 


’ 


-46- 


5.  That  the  minor  cycle  is  quite  apparent  in  both  groups  of  factors 
and  is  believed  to  be  due  primarily  to  the  fact  that  an  increasing  quantity  of 
money  and  credit  has  made  business  enterprise  more  profitable,  and  secondarily 
through  the  operation  of  the  quantitative  law.  The  movement  is  a cyclical  one, 
perhaps,  because  the  cyclical  movement  can  be  noticed  for  the  bank  reserves,  loans 
and  deposits,  and  it  may  be  that  these  factors  that  give  the  general  price  level 
of  stocks  its  characteristic  movement.  The  movement  is  cyclical  for  the  monetary 
and  banking  factors  because  of  the  nature  of  the  lending  process  of  banks,  because 
it  is  the  constant  tendency  of  economic  phenomena  to  recoil  after  a rise  or  fall; 
because,  finally,  economic  phenomena  of  this  sort  appears  to  work  in  a cyclical 
fashion  as  do  many  other  facts  of  life.  A full  explanation  of  the  phenomena  of 
these  cyclical  movements  of  a relatively  long  duration  cannot  be  given  at  thi3 
point;  suffice  it  to  say  that  this  movement  is  characteristic  of  the  monetary  and 
banking  factors,  and  is  carried  over  by  them  into  the  general  price  level  of 
stocks. 

6.  That  the  seasonal  cycle,  as  has  already  been  noted,  is  clearly  ap- 
parent in  both  the  indices  of  the  prices  of  stocks  and  the  monetary  and  banking 
group  of  factors.  The  seasonal  cycle  is  believed  to  be  primarily  due  to  the  fact 
that  a changing  available  supply  of  bark  funds  reacts  upon  the  general  price  lev- 
el of  stocks  by  affecting  the  demand  and  the  supply  sides  of  the  stock  exchange 
market  and  thus  causing  prices  to  advance  generally,  or  to  decline  as  has  been 
previously  shown.  Secondarily,  the  seasonal  cycle  is  believed  to  be  due  to  the 
fact  that  the  contraction  and  expansion  of  credit  in  the  fall  and  the  winter  of 
the  year,  causes  business  enterprise  to  become  less  and  finally  more  profitable 
concomitantly  with  this  contraction  and  expansion  of  credit.  The  primary  cause 
is  believed  to  be  the  more  important  of  the  two.  This  movement  is  a cyclical  one 
from  the  nature  of  the  phenomena  that  cause  the  seasonal  movement;  namely,  the 
harvesting,  moving,  and  selling  of  the  grain  in  the  West  and  Middle  West.  This 


- 


_ 


- 


. 


-47- 


ha  s already  been  outlined  in  the  previous  pages  of  this  chapter. 

7.  That  the  month  to  month  variations  have  no  relation  between  the 
monetary  and  banking  factors  and  the  general  price  level  of  stocks,  and  conse- 
quently, no  rules  for  correlation  can  be  given  here. 

8.  That  the  influence  of  the  monetary  and  banking  factors  would  produce 
the  secular  trend,  major,  minor,  and  seasonal  cyclical  variation  in  the  general 
price  level  of  stocks  in  the  absence  of  all  other  forces. 

9.  That  the  monetary  and  barking  factors  are  not  the  sole  force  acting 
upon  the  general  price  level  of  stocks,  and  that  often  the  influence  of  this 
group  of  factors  is  quite  nullified  by  the  action  of  other  forces. 

10.  That  usually  the  causal  sequence  proceeds  from  the  monetary  and 
banking  factors  to  the  general  price  level  of  stocks.  It  is  freely  admitted  that 
the  influence  between  these  two  groups  may  often  be  reciprocal,  and  that  many 
changes  in  the  monetary  and  banicing  factors  have  been  occasioned  by  changes  in 
the  general  price  level  of  stocks,  but  a careful  examination  of  the  graphs  and  a 
consideration  of  the  way  in  which  business  enterprise  uses  bank  credit  seems  to 
lead  to  the  conclusion.  This  is  especially  clear  in  the  light  of  the 

A 

analysis  found  on  the  first  few  pages  of  this  chapter. 


r 


-48- 


CKAPTER  V.  THE  GENERAL  PRICE  LEVEL  OF  STOCKS  AND  INDICES 
OP  THE  CONDITION  OP  BUSINESS  ENTERPRISE 
In  this  chapter,  the  indices  of  the  prices  of  stocks  are  to  be  compared 
and  correlated  with  certain  indices  which  show  the  condition  of  business  enter- 

Wm- 

prise.  The  data  for  these  indices  has-  been  plotted  in  graphical  form  upon  two 
charts  which  will  be  found  appended  to  this  study.  The  data ^a^plot ted  upon  two 
charts  for  purposes  of  convenience  only,  so  that  each  graph  would  stand  out  clear- 
ly. The  two  charts  are  labelled  "Business  Enterprise  Group,  Part  One",  and  "Busi- 
ness Enterprise  Group,  Part  Two".  Data  for  the  following  indices  of  business  con- 

dition  has-  been  plotted  upon  the  respective  charts :- 

/\ 

Business  Enterprise  Group.  Part  1 

Bank  Clearings  in  New  York  City 
Bank  Clearings  Outside  New  York  City 

Listing  of  Stocks  on  the  New  York  Stock  Exchange 
Listing  of  Bonds  on  the  New  York  Stock  Exchange 

Unfilled  orders,  United  States  Steel  Corporation 

Business  Enterprise  Group.  Part  2 

Business  Failures 

Anthracite  Coal  Shipments 

New  Incorporations 

Building  Permits  Issued  (total  value) 

Pig  Iron  Tonnage 

A description  of  the  nature  and  source  of  this  data  will  be  found  in  Appendix  A. 

Bank  Clearing  in  and  out  of  New  York  City  and  the  General  Price  Level 

of  Stocks: 

The  movements  of  the  indices  showing  the  bank  clearings  in  New  York  City 
and  the  movement  of  the  graph  showing  bank  clearings  outside  of  New  York  City  fol- 
low each  other  very  closely  with  the  bank  clearings  in  New  York  City  at  a uniform- 
ly higher  level  throughout,  and  showing  a wider  variation.  Both  series  will  be 


_ _ 

. 


-49- 


cons  idered  simultaneously  with  the  index  numbers  of  stock  prices. 

Comparison  between  these  two  groups  of  phenomena  reveals  the  fact  that 
the  movements  of  the  general  price  level  of  stocks  and  bank  clearings  are  very 
closely  related  in  all  the  movements,  with  the  possible  exception  of  the  month  to 
month  variation.  Another  point  in  this  connection  is  the  fact  that  the  movements 
of  the  indices  of  the  prices  of  stocks  begin  at  a period  of  from  one  to  three 
months  in  advance  of  the  same  movements  in  the  case  of  bank  clearings.  The  sea r- 
sonal  cycle  for  bank  clearings  is  different  in  character  from  the  seasonal  cycle 
for  the  general  price  level  of  stocks.  At  the  point  where  stocks  usually  decline, 
the  bank  clearings  rise,  and  where  the  prices  of  stocks  work  back  to  normal,  the 
bank  clearings  decline. 

These  movements  in  the  quantity  of  bank  clearings  may  indicate  several 
things.  In  the  first  place,  they  may  represent  an  increased  use  of  the  instru- 
ments of  bank  credit  that  are  handled  through  the  clearing  house  associations. 

In  the  second  place,  they  may  be  merely  the  result  of  the  operation  of  the  quan- 
titative law;  that  is  to  say,  the  same  amount  of  business  transactions  were  being 
cleared,  but  that  they  were  now  measured  by  a smaller  unit.  In  other  words,  the 
general  price  level  of  commodities  had  risen.  In  the  third  place,  they  may  indi- 
cate that  business  enterprise  has  become  more  active,  not  necessarily  more  prof- 
itable, but  that  there  was  an  increasing  volume  of  business  being  done.  As  a 
matter  of  fact  these  movements,  the  cycles  and  the  secular  trend,  are  in  all 
probability  a result  of  a combination  of  the  causes  mentioned  above.  There  is 
sufficient  reason  to  justify  the  statement  that  bank  clearings  are  a fairly  satis- 
factory index  of  the  activity  of  business. 

Returning  now  to  the  fact  of  the  correlation  between  the  general  price 
level  of  stocks  and  bank  clearings  it  can  be  noticed  that  the  movements  of  the 
general  price  level  of  stocks  have  a counterpart  in  the  activity  of  business  en- 
terprise. The  general  price  level  of  stocks,  then,  is  again  affirmed  as  a more 


-50- 


or  less  satisfactory  index  of  the  condition  of  business  enterprise.  Not  as  an 
index  of  the  state  of  business  enterprise  at  any  particular  moment,  but  as  a pro- 
phetic index  of  the  way  that  business  enterprise  will  be  at  some  time  in  the  fu- 
ture. It  again  affirms  that  the  cyclical  movements,  and  the  secular  trend,  are 
not  peculiar  to  the  general  price  level  of  stocks,  earnings  and  dividends,  and 
monetary  and  banking  indices,  but  also  to  certain  indices  which  indicate  the  ac- 
tivity of  business  enterprise. 

It  is  not  believed  that  the  increasing  activity  of  business  enterprise, 
or  at  any  rate  the  increasing  volume  of  bank  clearings,  causes  these  movements 
in  the  general  price  level  of  stocks,  nor  that  they  are  any  link  at  all  in  the 
chain  of  causal  sequence.  The  major  or  minor  cycles  of  the  general  price  level 
of  stocks  is  not  caused  by  these  movements  in  the  case  of  the  bank  clearings,  but 
they  are  accompanied  by  them.  Before  any  further  steps  in  the  causal  sequence 
can  be  affirmed,  much  more  in  the  way  of  analysis  and  study  must  be  done. 

Nothing  more  of  importance  can  be  ascribed  to  this  phenomena  in  the 
case  of  bank  clearings  at  this  point.  Their  general  agreement  with  the  movements 
of  the  general  price  level  of  stocks  serves  more  to  affirm  that  these  movements 
are  genuine  for  business  enterprise.  It  is  also  of  interest  to  observe  what 
takes  place  in  the  field  of  business  activity  when  the  general  price  level  of 
stocks  changes.  Other  than  their  use  as  corroborative  evidence,  they  have  little 
value.  Bank  clearings  are  a quantitative  rather  than  a qualitative  index  of  the 
state  of  business  enterprise.  They  indicate  rather  that  business  is  active  or 
inactive,  that  the  trade  turnover  is  heavy  or  light,  but  do  not  show  business 
enterprise  as  good  or  bad,  that  is, as  profitable  or  unprofitable. 

Listings  of  Stocks  and  Bonds  on  the  New  York  Stock  Exchange  and  the 
General  Price  Level  of  Stocks: 

The  data  for  the  listings  of  bonds  and  stocks  on  the  New  York  Stock 
Exchange  is  annual  and,  consequently,  the  seasonal  cycles  and  month  to  month  var- 


-51- 


iation  cannot  be  compared.  The  movements  of  these  two  indices  follow  each  other 
very  closely  in  most  respects.  The  listings  of  stocks  show^  a much  wider  varia- 
tion and  dispersion  than  does  the  listings  of  bonds,  but  this  is  as  would  natur- 
ally be  expected  from  the  nature  of  these  factors.  Movements  of  these  two  factors 
are  indicative  of  two  things;  in  the  first  place,  they  indicate  the  number  of  new 
corporations  that  are  being  formed,  of  a size  and  character  to  make  it  advantag- 
eous for  their  securities  to  be  listed  upon  the  exchange;  in  the  second  place, 
they  show  the  growth  in  size  and  character  of  the  existing  corporations  which 
make  it  advantageous  to  list  their  securities.  They  are  rough,  general,  indices 
of  the  condition  of  business  enterprise  as  being  good  or  bad.  Increasing  listings 
will  generally  mean  that  business  enterprise  is  becoming  better,  and  decreasing 
listings  will  ordinarily  indicate  the  opposite  state  of  affairs.  As  an  index, 
they  differ  from  bank  clearings  in  that  bank  clearings  are  more  or  less  represen- 
tative of  the  activity  of  business,  while  listings  are  more  or  less  representative 
of  the  state  or  condition  of  business  as  being  good  or  bad.  Bank  clearings  are 

; 

a quantitative  index,  and  listings  are  a qualitative  index. 

. 

In  spite  of  the  very  violent  fluctuations  which  the  listings  make,  a 
rising  secular  trend,  major  cycles  and  minor  cycles  can  be  distinguished,  and  a 
very  rough  general  correspondence  can  be  made  with  the  general  price  level  of 
stocks.  Again,  these  movements  may  have  been  affected  by  the  quantitative  law, 
that  is  to  say,  the  quantity  of  money  and  credit  may  have  had  some  effect  in  these 
movements,  more  particularly  the  rising  secular  trend.  The  fluctuation  that  these 
listings  make  are  of  too  violent  a character,  and  bear  too  small  a relation  to 
the  graph  of  the  total  quantity  of  money  in  circulation  to  assign  this  as  a cause 
however.  This  wide  dispersion  and  violence  also  serves  to  discredit  the  assign- 
ment of  the  increasing  use  of  the  corporate  form  of  business  enterprise  as  the 
sole  reason  for  these  movements.  While  this  has  not  been  without  its  importance, 

the  growth  is  not  of  the  even  character  that  one  would  expect  to  find  from  a sole 


I 


■ 


- 


« 


- • 


-52- 


cause  such  as  this.  It  can  be  assumed,  then,  that  business  enterprise  has  gracU 
ually  increased  in  profitableness,  and  that  the  condition  of  business  enterprise 
has  moved  in  cycles  of  the  kind  noted,  at  the  same  time  that  its  condition  was 
becoming  better. 

The  fact  of  the  correspondence  between  the  movements  of  the  general 
price  level  of  stocks  with  the  movements  of  the  listings  of  stocks  and  bonds 
serves  to  bear  out  the  contention  that  the  general  price  level  of  stocks  is  a 
fairly  good  index  of  the  quality  or  state  of  business  enterprise.  It  shows  that 
business  enterprise  is  at  the  basis  of  the  values  of  stocks.  The  correspondence 
merely  serves  to  affirm  the  fact  that  the  general  price  level  of  stocks  reflects 
the  condition  of  business  enterprise,  and,  probably,  is  to  a large  extent  govern- 
ed by  it. 

We  pass  now  to  a consideration  of  the  unfilled  orders  of  the  United 

States  Steel  Corporation  and  pig  iron  tonnage.  These  -faetoro  will  be  considered 

A. 

at  the  same  time  due  to  their  similarity  in  character,  and  due  to  the  fact  that 
they  are  both  indices  of  slightly  different  phases  of  the  same  thing. 

Unfilled  Orders  of  the  United  States  Steel  Corporation.  Pig  Iron  Ton- 
nage. and  the  General  Price  Level  of  Stocks: 

Pig  iron  is  the  basis  of  a great  many  manufacturing  processes  and  sta- 
tistics indicating  the  amount  of  pig  iron  that  is  being  used  are  of  interest  in 
showing  the  activity  of  business  enterprise  with  especial  reference  to  manufac- 
turing, building,  and  railroad  development.  The  unfilled  orders  of  the  United 
States  Steel  Corporation  are  reported  in  dollars.  An  increase  in  these  figures 
indicates  a new  and  larger  demand  for  raw  iron  and  steel.  It  indicates  an  im- 
mediate increase  in  the  demand  for  which  the  plants  of  the  Steel  Corporation  have 
not  yet  had  time  to  make  a proper  adjustment,  and  hence  the  orders  must  be  car- 
ried for  some  time  as  unfilled.  The  pig  iron  tonnage  is  quoted  in  tons,  and 
hence  is  unaffected  by  changes  in  the  purchasing  power  of  the  dollar.  This  ser- 


-53- 


ies  indicates  the  present  state  of  iron  production.  The  unfilled  orders  shows 
the  effect  of  an  immediate  increase  in  building,  manufacturing,  and  railroad  de- 
velopment, and  is  also  affected  by  the  purchasing  power  of  the  dollar.  This 
series  is  the  most  sensitive  of  the  two.  The  pig  iron  tonnage  shows  changes  in 
building,  manufacturing,  and  railroad  development  after  they  have  had  time  to 
work  themselves  out  in  the  production  of  the  pig  iron  plants.  It  shows  changes 
after  they  have  been  in  effect  for  some  time,  and  is  not  as  sensitive  to  imme- 
diate increases  in  the  demand  as  is  the  unfilled  tonnage. 

Neither  one  of  these  will  be  able  to  indicate  with  any  certainty  the 
profitableness  of  business  enterprise,  but  they  will  rather  indicate  the  activity 
of  manufacturing  enterprise.  Of  course,  an  increasing  activity  of  business  en- 
terprise with  reference  to  manufacturing^ as  indicated  by  these  iron  and  steel 
statistics^will  usually  mean  that  enterprise  is  becoming  more  profitable,  and 
hence  is  expanding  its  activity.  This  series  of  iron  and  steel  statistics,  like 
the  preceding  business  enterprise  indices,  is  no  step  in  the  causal  sequence 
underlying  business  activity.  They  will  serve  more  to  confirm  the  accuracy  of 
the  indices  of  the  prices  of  stocks  as  representative  of  business  conditions. 
With  these  facts  in  mind  we  can  now  proceed  to  the  task  of  comparing  the  fluctua- 
tions  that  these  indices  make  with  those  of  the  indices  of  the  general  price  lev- 
el of  stocks. 

The  fluctuations  that  both  of  these  iron  indices  make  follow  very 
closely  the  fluctuations  made  by  the  index  numbers  of  the  general  price  level  of 
stocks.  The  movements  that  they  make  lag  from  three  to  nine  months  behind  the 
movements  made  by  the  index  of  stock  prices.  This  serves  to  confirm  again  the 
fact  that  the  prices  of  stocks  are  a more  or  less  anticipatory  index  of  the  con- 
dition of  business  enterprise.  The  fact  that  the  pig  iron  tonnage  shows  the 
movements,  especially  the  secular  trend,  indicates  that  it  is  not  the  quantita- 
tive law  alone  that  accounts  for  the  movements.  Seasonal  variation  is  not  pres- 


. 

. 


* 


- 


. 


-54- 


ent  in  either  of  the  iron  series,  hut  this  fact  in  no  way  destroys  the  value  of 
the  indices  as  showing  the  state  of  business  activity. 

The  unfilled  orders  of  the  Steel  Corporation  is  the  more  sensitive  in- 
dex of  the  two,  and  a glance  at  these  two  graphs  shows  the  greater  delicacy  with 
which  this  index  registers  changes.  It  also  registers  changes  several  months 
in  advance  of  the  pig  iron  series. 

It  is,  therefore,  in  order  to  conclude  that  the  general  price  level  of 
stocks  registers  in  advance  with  some  degree  of  accuracy,  the  state  of  activity 
of  building,  manufacturing,  and  railroad  development. 

Business  Failures  and  the  General  Price  Level  of  Stocks: 

Business  failures  afford  a qualitative  index  of  the  condition  of  busi- 
ness enterprise.  They  show  business  enterprise  as  relatively  good  or  bad;  as 
profitable  or  unprofitable,  but  show  nothing  of  the  amount  of  business  that  is 
being  transacted. 

A comparison  of  the  index  of  business  failures  with  that  of  the  gener- 
al price  level  of  stocks  shows  that  there  is  a very  close  correlation  between 
the  two,  although  the  fluctuations  of  the  business  failures  are  not  nearly  so 
wide  as  are  those  of  the  prices  of  stocks.  In  this  case, also,  we  can  notice  the 
fact  that  the  movements  of  the  general  price  level  of  stocks  anticipate  those  of 
the  business  failures  by  a period  of  about  three  months.  All  the  movements  that 
the  general  level  of  stocks  make  have  their  counterpart  in  the  movements  of  the 
business  failures.  The  secular  trend,  major  and  minor  cycles,  seasonal  cycle, 
and  month  to  month  variation  are  all  present.  When  business  failures  increase 
in  number  and  amount,  the  prices  of  stocks  fall,  and  when  business  failures  de- 
crease, the  prices  of  stocks  increase.  The  correlation  is  thus  of  an  opposite 
character  to  that  of  most  of  the  other  indices,  and  the  movements  are  not  nearly 
so  pronounced.  The  correlation  is  sufficiently  strong  and  distinct,  however, 
to  warrant  us  in  saying  that  the  prices  of  stocks  are  an  accurate  index  of  the 


I 


. 


. 


. 


. 


- 


I 


-55- 


condition  of  "business  enterprise  in  the  light  of  "business  failures.  More  than 
this  we  cannot  affirm,  "but  this  much  is  clear. 

There  is  one  point  in  connection  with  the  "business  failures  that  seems 
peculiar  and  which  does  not  find  a counterpart  in  the  movements  of  the  general 
price  level  of  stocks.  That  is  the  fact  that  the  "business  failures  increase  in 
the  month  of  January  for  almost  every  year  and  decline  the  following  February. 
This  movement  is  quite  sharply  defined.  Sometimes  the  prices  of  stocks  will  be 
found  to  decline  at  the  same  time,  but  the  correlation  is  not  a persistent  one  by 
any  means.  Thi3  may  be  explained  by  the  fact  that  the  general  price  level  of 
stocks  anticipates  the  condition  of  business  enterprise,  and  that  this  increase 
in  business  failures  at  this  time  has  already  been  discounted  by  the  October- 
November  seasonal  decline  in  the  prices  of  stocks.  This  movement  in  business 
failures  has  persisted  for  some  time,  and  it  is  quite  likely  that  the  movement 
is  anticipated  by  the  stock  prices  some  months  before.  It  is  not  an  easy  matter 
to  explain  the  increase  in  business  failures  at  this  time,  but  there  are  some 
facts  that  may  be  able  to  shed  light  on  this  phenomena. 

In  the  first  place,  there  very  generally  is  a shortage  of  funds  in  the 
fall  of  each  year,  and  business  men  will  find  it  more  difficult  to  find  funds  for 
working  capital  in  the  fall  than  they  would  at  any  other  time.  This  inability 
to  obtain  the  necessary  working  capital  some  months  past  may  show  in  the  quota 
of  failures  at  this  time.  Then  January  is  the  month  for  closing  up  the  books, 
and  during  this  time  many  business  men  seek  to  collect  their  over-due  accounts. 
This,  of  course,  is  bound  to  precipitate  many  failures.  Many  business  men  at 
this  time  decide  to  go  into  voluntary  bankruptcy,  because  the  financial  state- 
ments tell  the  story  of  impending  failure. 

In  the  main  it  can  be  concluded  that  the  general  price  level  of  stocks 
is  a satisfactory  index  of  the  state  of  business  enterprise  from  the  qualitative 
point  of  view  of  business  failures.  The  correlation  between  the  two  graphs  is 


~T  ^ 


. 


■ 


' 

. 

- 


-56- 


quite  clear  and,  with  the  single  exception  noted,  is  complete. 

Anthracite  Coal  Shipments: 

The  shipments  of  anthracite  coal  in  the  East,  in  a limited  way,  denotes 
the  activity  of  "business  enterprise  from  the  point  of  view  of  the  extractive, 
railroad,  and  manufacturing  industries.  It  is  a quantitative  index,  and  shows 
enterprise  as  expanding  or  contracting  in  these  fields.  It  is  not  a very  delicate 
index  when  compared  to  other  indices,  "but  it  affords  at  least  a good  guess.  This 
index  is  measured  in  terms  of  tons  rather  than  in  terms  of  dollars  and  so  it  will 
not  show  the  influence  of  the  quantitative  law.  It  has  a very  great  month  to 
month  variation,  and  the  dispersion  is  relatively  high. 

The  correlation  "between  the  movements  of  this  index  and  the  movements 
of  the  general  price  level  of  stocks  is  quite  clear.  The  cyclical  movements  and 
the  secular  trend  are  present,  hut  they  lag  behind  these  movements  for  the  prices 
of  stocks.  There  is  very  little  relation  between  the  seasonal  cycle  and  also  the 
month  to  month  variation  in  the  case  of  anthracite  coal  shipments  and  the  prices 
of  stocks.  There  are  some  movements  also  peculiar  to  the  shipments  of  anthracite 
coal  which  cannot  be  observed  for  the  prices  of  stocks. 

The  shipments  of  anthracite  coal  gradually  increase  during  the  first 
few  months  of  the  year  and  reach  a high  point  approximately  in  the  month  of  May. 
They  then  decline  during  the  next  two  or  three  months,  and  then  rise  to  another 
high  point  about  in  October  and  decline  again  until  about  February  of  the  follow- 
ing year,  when  they  again  rise.  This  movement  is  not  exact  for  all  the  years 
under  consideration,  but  there  are  very  generally  two  distinct  rises  and  declines 
approximating  in  time  the  periods  mentioned  for  each  year.  There  is  no  explana- 
tion offered  for  this  movement.  It  does  not  find  its  counterpart  in  the  movements 
of  the  general  price  level  of  stocks.  Were  it  not  for  the  character  of  this  move- 
ment it  might  be  possible  to  ascribe  the  seasonal  movement  to  the  shipments  of 
anthracite,  but  this  cannot  be  done  with  accuracy  on  this  account.  The  monthly 


-57- 


variation  is  so  vory  high  that  hat  little  confidence  can  "be  placed  in  this  index. 

In  general,  however,  the  longer  movements  of  the  prices  of  stocks  are 
shown  by  the  shipments  of  anthracite,  and  this  serves  further  to  corroborate  the 
judgment  that  the  prices  of  stocks  are  a good  index  of  the  condition  of  business 
enterprise  from  the  quantitative  point  of  view. 

New  Incorporations: 

New  incorporations  in  the  eastern  states  involving  a million  dollars 
or  more  are  both  a qualitative  and  a quantitative  index  of  the  condition  of 
business  enterprise.  When  business  is  good,  that  is,  profitable,  new  enterprises 
are  created  and  we  find  many  new  incorporations.  When  business  is  active,  that 
is,  when  trade  is.  turning  over  rapidly,  we  are  also  apt  to  find  new  incorpora- 
tions. Thus  new  incorporations,  in  some  measure,  indicate  both  phases  of  busi- 
ness enterprise.  Since  this  series  is  measured  in  terms  of  dollars  it  is  sub- 
ject also  to  the  action  of  the  quantitative  law,  both  in  its  relation  to  money 
and  also  to  credit. 

Only  in  the  most  general  terms  can  it  be  inferred  that  there  is  a 
correlation  between  the  general  price  level  of  stocks  and  the  new  incorporations. 
The  month  to  month  variation  is  so  very  great  in  the  case  of  the  new  incorpora- 
tions that  it  is  not  possible  to  distinguish  the  secular  trend  and  the  cyclical 
movements.  It  can  be  said,  however,  that  when  stocks  begin  to  rise  an  increase 
in  the  new  incorporations  can  be  noticed,  and  these  incorporations  appear  to 
fall  off  when  prices  of  stocks  decline.  The  seasonal  variation  for  the  new  in- 
corporations differs  essentially  from  the  seasonal  variation  for  the  prices  of 
stocks.  New  incorporations  appear  to  increase  during  the  middle  of  the  year  and 
then  decline  only  to  increase  towards  the  last  two  months  and  again  decline. 

This  is  the  most  persistent  movement  that  this  series  can  be  observed  to  make. 
Although  the  cyclical  movements  cannot  be  correlated  here,  there  is  the  general 
similarity  of  movement  that  lias  been  noted.  It  can  thus  be  affirmed  that  from 


- 


. 

: 

. ■ 


. 


. 


. 


. 


- 


' 


. 


-58- 


tha  point  of  view  of  new  incorporations  the  general  price  level  of  stocks  re- 
flects this  phase  of  enterprise. 

We  might  expect  that  a great  many  new  incorporations  would,  operate  to 
depress  the  prices  of  stocks  by  reason  of  the  listing  of  so  many  new  securities 
on  the  exchange.  This  fact  is  not  indicated  on  the  indices  of  stock  prices,  how- 
ever, and  so  it  must  be  rejected.  When  the  new  listings  of  stocks  were  compared 
with  the  prices  of  stocks,  it  was  observed  that  increased  listings  were  accompa- 
nied by  higher  prices  for  stocks.  Another  series,  the  stock  exchange  trading 
group,  discussed  in  chapter  IX  will  shed  further  light  upon  this  problem. 

Building  Permits  Issued: 

The  building  permits  issued  are  recorded  in  terms  of  dollars,  and  so 
may  be  expected  to  show  the  effects  of  the  quantitative  law.  This  index,  like 
new  incorporations,  is  both  qualitative  and  quantitative  in  its  nature.  Building 
permits  on  the  increase  indicate  an  increased  activity  and  turnover  of  business 
and  at  the  same  time  tend  to  show  that  business  enterprise  is  becoming  more  prof- 
itable and  is  consequently  expanding.  This  index  is  in  many  respects  similar  to 
the  new  incorporations,  but  it  may  indicate  an  expansion  of  plants  already  ex- 
isting rather  than  the  creation  of  new  corporations. 

The  correlation  between  the  number  of  building  permits  issued  and  the 
prices  of  stocks  is  an  extremely  close  one  in  all  respects.  The  secular  trend, 
the  major,  minor,  and  seasonal  cycles  are  present  in  the  building  permits.  A 
distinct  lag  can  be  noted  in  the  building  permits  of  about  six  months  in  duration. 

The  value  of  building  permits  can  be  observed  to  increase  during  the 
first  five  or  six  months  of  the  year  and  then  to  fall  off  during  the  remainder  of 
the  year.  This  movement  does  not  find  its  precise  counterpart  in  the  movements 
of  the  general  price  level  of  stocks  and  is  due,  doubtless,  to  conditions  pre- 
vailing in  the  building  trades.  This  is  the  only  exception  to  the  general  corre- 
lation existing  between  these  two  groups,  which  is  far  more  clearly  defined  than 


- • 

■* 

- 

' 

> ' 

i r, 


- ‘ ...  - 


-59- 


it  was  between  stock  prices  and  new  incorporations. 

A general  conclusion,  that  stock  prices  are  a good  index  of  the  state 
of  business  enterprise  as  reflected  by  the  amount  and  value  of  new  building,  can, 
therefore,  be  made. 

So  much  for  the  general  correlation  between  the  prices  of  stocks  and 
the  various  factors  indicating  the  activity  of  business  enterprise.  The  next 
task  is  that  of  drawing  such  conclusions  as  the  correlations  seem  to  hold. 

Conclusions: 

1.  That  there  is  a very  close  similarity  between  the  movements  of  the 
general  price  level  of  stocks  and  the  indices  showing  the  activity  of  business 
enterprise  group,  and  that  the  general  price  level  of  stocks  reflects  the  quality 
of  business  enterprise  as  good  or  bad,  profitable  or  not  profitable,  as  well  as 
the  actual  turnover  of  trade. 

2.  The  reasons  indicated  by  the  graphs  for  this  close  correlation  are: 

(a)  The  action  of  the  quantitative  law  with  reference  to  money  and  to  credit. 

(b)  that  stocks  are  high  or  low  in  price  due  to  the  condition  of  business 
enterprise  which  they  anticipate,  and  that  this  fundamental  condition  of  business 
is  indicated  both  by  the  prices  of  stocks,  which  anticipate  this  movement,  as 
well  as  the  various  graphs  grouped  under  the  heading  of  business  enterprise  fac- 
tors. 

3.  That  there  is  no  causal  sequence  between  the  business  enterprise 

•g&otoro  and  the  general  price  level  of  stocks. 

A 

4.  Finally,  that  the  general  price  level  of  stocks  is  an  accurate  an- 
ticipatory index  of  the  state  of  business  enterprise  from  the  point  of  view  of 
listings  of  bonds  and  stocks  on  the  New  York  Stock  Exchange;  unfilled  orders  of 
the  United  States  Steel  Corporation;  tonnage  of  pig  iron;  bank  clearings  in  and 
out  of  New  York  City;  business  failures;  shipments  of  anthracite  coal;  new  in- 
corporations; and  building  permits  issued. 


n 


: 

. 


1 • 

' J*  '«  ... 


pi  . 1 rJ*.  1 " v 


. 


* 


► 


-60- 


CHAPTER  VI.  RELATIONS  EXISTING  BETWEEN  THE  GEMS  HAL  PRICE  LEVEL 
OF  STOCKS  AND  THE  FOREIGN  TRADE  GROUP. 

The  foreign  trade  group  is  composed  of  the  following  indices: 

1.  Average  monthly  rate  of  sterling  exchange 

2.  Monthly  exports  of  the  United  States 

3.  Monthly  imports  of  the  United  States 

The  chart  with  these  indices  plotted  upon  it  will  he  found  appended  to  this  study. 
A discussion  of  the  nature  and  source  of  the  data  will  he  found  in  Appendix  A. 

These  indices  representing  the  foreign  trade  of  the  United  States  afford 
some  knowledge  of  the  state  of  business  enterprise,  hut  in  a different  manner  from 
those  factors  considered  -under  the  business  enterprise  group.  This  group  of  fac- 
tors shows  the  actual  activity  and  volume  of  trade  which  business  enterprise  in 
the  United  States  is  carrying  on  with  the  several  foreign  nations.  The  foreign 
trade  factors  indicate  business  enterprise  from  the  point  of  view  of  trade,  its 
activity.  In  other  words  this  group  is  a quantitative  index  of  business  enter- 
prise from  the  point  of  view  of  foreign  business*  Foreign  trade  differs  in  some 
important  points  from  domestic  trade  and  in  some  respects  may  be  said  to  be  inde- 
pendent of  it.  Business  at  home  may  be  progressing  well,  and  the  state  of  business 
enterprise  may  be  quite  active  and  prosperous,  while  the  foreign  trade  is  quite 
inactive.  However,  an  increasing  or  a decreasing  activity  in  the  field  of  foreign 
trade  is  not  without  its  significance  for  the  state  of  business  enterprise,  for  if 
foreign  trade  is  observed  to  increase  or  to  fall  off,  it  is  quite  possible  that 
similar  changes  are  taking  place  in  the  state  of  business  enterprise.  For  these 
reasons,  it  was  felt  to  be  advisable  to  make  a separate  comparison  between  the 
foreign  trade  group  and  the  general  price  level  of  stocks. 

Secular  trend  is  found  in  both  the  exports  and  the  imports,  but,  of 
course,  is  not  found  in  the  monthly  average  rate  of  sterling  exchange.  The  major 


. 


. 


••  ; ; •:  . 

. 


. 


* 


-el- 


and the  minor  cycles  are  not  found  in  any  of  the  factors.  It  is  evidently  not  the 
nature  of  these  factors  to  move  in  cycles  of  this  duration.  We  would  ordinarily 
not  expect  to  find  these  cycles  in  the  case  of  the  average  rate  of  sterling  ex- 
change, hut  from  what  has  been  seen  of  other  indices,  we  might  expect  to  find 


these  movements  in  theNforeign  trade  factors.  The  reason  for  the  failure  of  mer- 

l\  A 

chandise  exports  and  imports  to  reflect  the  larger  cyclical  movements  probably 
lies  in  the  fact  that  these  factors  are  concerned  with  the  trade  of  more  than  the 
United  States  alone;  they  are  concerned  with  the  trade  of  the  United  States  and 
many  other  foreign  nations.  In  this  way  the  cyclical  tendencies  of  our  own  busi- 
ness enterprise  may  be  lost.  Foreign  business  may  be  moving  in  a v; ay  quite  dif- 
ferent from  the  way  in  which  the  domestic  business  is  moving,  and  the  movements 
of  our  own  business  may  be  lost  in  these  movements.  All  the  various  indices  that 
we  have  thus  far  examined  were  concerned  with  domestic  business,  and  most  of  them 
showed  cycles  of  a similar  nature.  Since  foreign  trade  is  concerned  with  the 
business  of  several  countries,  it  is  possible  that  differing  cyclical  movements 
abroad  might  operate  to  destroy  the  movement  for  our  own  foreign  trade.  A posi- 
tive answer  to  this  question  cannot  be  given  unless  the  business  cycles  of  these 
countries  are  studied  in  extensive  fashion  for  this  period;  a task  beyond  the 
scope  of  this  investigation. 

A seasonal  cycle  is  present  in  the  exports  of  the  United  States  and  al- 
so in  the  average  monthly  rate  of  sterling  exchange.  The  imports  do  not  show  the 
seasonal  cycle.  This  seasonal  cycle  is  annual  in  character  and  is  generally  a 
smooth  movement.  The  low  point  is  usually  attained  in  July.  From  this  month  on 
the  exports  gradually  rise,  attaining  a high  point  in  October  or  November,  from 
which  point  they  decline  gradually  until  July.  The  seasonal  cycle  for  sterling 
exchange  resembles  this  movement  in  character,  although  it  is  less  pronounced, 
and  is  a smoother  movement.  Our  exports  consist  of  a great  many  agricultural 
products,  notably  the  cereals.  A large  quantity  of  these  cereals  is  exported  to 


. 


• ■ 


. 

. 


-62- 


English  ports.  Beginning  with  the  harvesting  period  our  exports  of  grain  in- 
crease up  to  October -November , and  gradually  decline  until  July.  Since  much  of 
this  cereal  finds  its  way  to  British  ports,  and  since  much  of  the  other  financing 
is  done  through  London,  the  rate  of  sterling  exchange  is  bound  to  reflect  this 
movement.  Thus  the  seasonal  cycle  for  exports  and  for  the  rate  of  sterling  ex- 
change is  occasioned  by  the  same  forces  that  occasion  this  movement  in  some  of 
the  money  and  banking  group;  especially,  bank  reserves,  interest  rates,  and  loans 
and  deposits.  The  imports  of  merchandise  do  not  show  this  cycle,  because  our  im- 
ports are  very  largely  in  the  nature  of  manufactured  goods.  There  is  too  small 
a proportion  of  agricultural  produce  to  show  the  agricultural  seasonal  cycle. 

The  remaining  movements  are  the  small  month  to  month  variations  and, 
apparently,  they  bear  no  relation  to  these  movements  in  the  case  of  stock  prices. 
These  small  movements  depend  upon  many  factors  which  seem  to  be  peculiar  to  the 
foreign  trade  group.  A comparison  of  these  small  movements  with  other  small 
movements  for  different  groups  is  beyond  the  scope  of  this  investigation. 

There  yet  remains  one  movement  of  importance  in  connection  with  these 
indices;  that  is  the  fact  that  the  secular  trend  of  the  imports  is  not  so  great 
as  is  that  of  the  exports.  In  the  nineties  it  can  be  observed  that  exports  and 
imports  are  very  close  together  in  the  matter  of  secular  trend,  but  that  gradu- 
ally the  secular  trend  of  the  exports  becomes  greater  than  that  of  the  imports. 
This  reflects  the  increasing  ”favorable  balance  of  trade”.  The  distance  between 
these  two  graphs  becomes  great  in  the  second  decade  of  the  twentieth  century. 

For  the  state  of  business  enterprise,  this  is  important  because  it  is  indicative 
of  the  expanding  activity  of  American  business  enterprise.  It  shows  that  our 
trade  turnover  is  increasing,  especially  for  our  manufacturing  and  extractive 
industries.  It  shows,  further,  that  the  volume  of  domestic  manufacturing  is  in- 
creasing and  that  we  are  depending  less  and  less  upon  foreign  countries  for  our 


. 


. 


- 1 


- 

. 


. 

. 


. 


-63- 


manufactured  goods.  Since  both  the  exports  and  the  imports  are  measured  by  the 
same  unit,  the  dollar  in  this  case, changes  between  the  levels  of  imports  and  the 
levels  of  exports  give  us  a more  positive  indication  of  this  fact  of  the  growth 
in  volume  and  activity  of  our  business  enterprise.  The  prices  of  stocks,  and 
the  other  indices  herein  considered,  are  again  affirmed  as  accurate  indices  of 
the  condition  of  business  enteiprise. 

4 

Outside  of  these  points,  to  which  attention  has  been  drawn  in  this 
chapter,  there  is  little  of  significance  between  the  movements  of  the  foreign 
trade  group,  and  the  prices  of  stocks.  These  relations  may  be  briefly  summarized 
in  the  following  statements: 

Conclusions  and  Summary: 

1.  The  only  correlation  that  can  be  noted  between  the  prices  of  stocks 
and  indices  of  foreign  trade  are  those  between  the  secular  trend  and  the  seasonal 
cycle  of  the  two  groups. 

2.  The  lack  of  correlation  between  the  other  cycles  may  be  due  to  the 
fact  that  business  enterprise  of  foreign  countries  follows  a different  minor  and 
major  cycle  from  that  followed  by  business  enterprise  in  the  United  States,  and 
hence  these  movements  for  our  business  enterprise  are  obliterated  as  far  as  these 
indices  are  concerned. 

3.  The  seasonal  cycles,  in  the  case  of  foreign  trade  as  was  found  in 
the  case  of  the  other  indices,  are  occasioned  by  the  seasonal  crop  period  in  the 
United  States. 

4.  Causal  connection  cannot  be  affirmed  between  the  prices  of  stocks 
and  the  foreign  trade  factors.  The  secular  trend  and  seasonal  cycle  are  occa- 
sioned in  each  group  by  independent  causes.  No  quantitative  or  qualitative  con- 
nection can  be  affirmed  between  the  two  groups. 

5.  The  indices  of  the  prices  of  stocks  are  again  affirmed  as  reliable 

tnrices  con^ti°n  business  enterprise  as  shown  by  the  foreign  trade  fac- 


-64- 


CHAPTER  VII.  THE  GENERAL  PRICE  LEVEL  OF  STOCKS 
AMD  COMMODITY  PRICES. 

Three  graphs  of  commodity  prices  have  been  plotted  upon  one  chart  un- 
der the  heading  of  “Commodity  Price  Group”.  These  prices  are:- 

1.  An  index  number  of  the  prices  of  raw  commodities 

2.  An  index  number  of  the  prices  of  manufactured  commodities 

3.  An  index  number  of  mixed  commodities 

This  chart  will  be  found  appended  to  this  study  and  a discussion  of  the  nature 
and  source  of  the  data  used  in  making  this  chart  will  be  found  in  Appendix  A. 

The  problem  of  this  chapter  is  to  attempt  to  correlate  the  movements 
of  these  commodity  prices  with  the  movements  of  the  general  price  level  of  stocks 
The  movements  of  the  three  indices  of  commodity  prices  follow  each  other  quite 
closely,  but  there  are  certain  differences  between  these  movements  that  are  quite 
significant  for  purposes  of  this  study.  Each  of  the  characteristic  movements 
will  be  separately  considered. 

Secular  trend:  There  is  a marked  upward  secular  trend  for  all  three 

indices  of  commodity  prices.  This  shows  that  there  has  been  a steady  change  in 
the  quantitative  relations  between  money  and  credit  and  commodities.  The  secu- 
lar trend  could  come  about  in  no  other  way.  J.  S.  Mill  has  pointed  out  that 
changes  in  the  general  level  of  prices  cannot  come  about  by  changes  in  the  de- 
mand and  supply  for  commodities,  because,  in  the  last  analysis,  effective  de- 
mand and  supply  are  one  and  the  same  thing.  Supply  is  made  up  from  goods  as  is 
also  demand.  Exchange  involves  the  trading  of  commodities.  An  increase  in  the 
total  quantity  of  goods  increases  the  supply,  but  at  the  same  time  it  increases 
the  effective  demand.  Demand  and  supply  are  one  and  the  same  thing  at  base; 
namely,  goods.  In  a developed  community  this  exchange  process  takes  place 


! 


■ 


* 


- ^ Ai  f & % 


. 


-65- 


through  the  medium  of  money  and  credit.  Money  and  credit,  as  the  medium  of  ex- 
change, are  at  the  same  time  the  standard  and  measure  of  value.  A change  in  the 
general  price  level  of  commodities  may  come,  then,  through  changes  in  the  rela- 
tions between  commodities  on  the  one  hand,  and  money  and  credit  on  the  other. 

Now  this  upward  secular  trend  in  commodity  prices  means  that  money  and 
credit  has  expanded  relative  to  the  quantity  of  commodities.  It  is  probably  true 
that  the  total  quantity  of  goods  has  been  increasing,  but  thi6  increase  has  not 
been  keeping  pace  with  the  increases  in  the  quantity  of  money  and  credit.  The 
upward  secular  trend,  then,  has  for  its  immediate  occasion  the  increasing  quanti- 
ty of  money  and  credit,  and  we  must  turn  to  the  money  and  banking  indices  for  an 
explanation  of  this  fact. 

Major  cycles:  The  characteristic  major  cycle  can  be  observed  for  the 

commodity  prices  just  as  clearly  as  they  were  for  the  general  price  level  of 
stocks.  There  is  no  appreciable  lag  between  the  major  cycles  of  the  two  groups. 
The  major  cycle  is  a much  more  pronounced  movement  for  the  index  of  raw  commodi- 
ty prices  than  it  is  for  the  prices  of  all  commodities  and  for  manufactured  com- 
modities. It  is  no  easy  task  to  explain  just  why  this  is  true.  It  is  not  clear 
just  why  the  prices  for  the  extractive  and  the  raw  commodity  industries  should 
be  less  stable  than  the  prices  for  manufactured  and  mixed  commodities,  when  the 
industries  are  so  mutually  interdependent.  It  may  be  possible  that  the  index 
number  for  raw  commodities  is  differently  constructed  from  those  for  the  other 
commodities.  It  may  lie  in  the  fact  that  the  extractive  and  raw  commodity  indus- 
tries are  more  subject  to  the  vagaries  of  trade  than  are  the  other  industries, 
but  it  would  seem,  then,  that  these  fluctuations  would  be  carried  through  and 
reflected  in  the  prices  of  manufactured  commodities.  It  is  true  that  the  cost 
of  raw  materials  are  but  one  of  many  costs  in  the  manufacturing  industry  and  that 
these  relatively  wide  fluctuations  are  lost  in  the  final  cost  summary.  The  im- 
portant fact,  however,  remains  that  the  major  cyclical  movement  is  characteristic 


i 


" 


i 


. 


. 


. 


-66- 


of  the  indices  of  the  prices  of  commodities  as  well  as  for  the  prices  of  stocks. 

Minor  cycles:  The  minor  cycle  can  he  observed  for  the  prices  of  com- 

modities in  ranch  the  same  manner  that  this  movement  manifested  itself  in  the 
prices  of  stocks,  but  in  the  case  of  commodities,  the  movement  is  not  so  well 
marked  nor  as  clearly  defined  as  it  was  for  the  prices  of  stocks.  In  the  minor 
cycle  of  the  prices  of  commodities,  the  characteristic  three  to  nine  months'  lag 
behind  the  prices  of  stocks  can  be  noticed.  The  prices  of  stocks,  relative  to 
the  prices  of  commodities,  as  far  as  the  minor  cycle  is  concerned,  may  be  termed 
an  anticipatory  index  of  the  condition  of  business  enterprise.  The  minor  cycli- 
cal movement  is  more  pronounced  in  the  case  of  the  prices  of  raw  commodities 
than  it  is  in  the  case  of  the  prices  of  other  commodities.  The  same  explanation 
that  was  offered  for  this  phenomenon  in  the  case  of  the  major  cycle  can  be  of- 
fered here  for  the  minor  cycle.  The  minor  cyclical  movement  is  a more  pronounced 
one  here  than  was  the  major  cycle,  and  it  can  be  clearly  distinguished  as  a per- 
sistent movement. 

Seasonal  cycles:  The  graph  of  the  index  number  of  the  prices  of  raw 

commodities  shows  the  seasonal  cycle  quite  clearly.  The  movement  in  this  case  is 
essentially  the  same  as  the  seasonal  cycle  for  the  various  other  graphs  that  have 
been  considered.  The  high  point  of  this  cycle  comes  approximately  in  December 
for  each  year,  and  the  low  point  in  August.  The  movement  is  quite  smooth  and 
well  rounded.  The  other  two  indices  of  commodity  prices  do  not  show  the  seasonal 
cycle  nearly  so  clearly  as  the  raw  commodity  prices.  How  and  then,  during  dif- 
ferent years,  the  cyclical  movement  can  be  detected,  but  is  quite  faint,  and  is 
not  the  pronounced  movement  of  this  character  that  we  find  in  the  case  of  the 
raw  commodity  prices. 

Since  the  index  of  raw  commodity  prices  is  made  up  largely  of  agricul- 
tural prices,  it  may  be  assumed  that  this  movement  is  characteristic  of  agricul- 
ture. The  movement  conforms  roughly  to  the  crop  moving  period  in  agriculture. 


I 


- 


* 


’ 

► 


* 


, 


-67- 


It  is  not  an  easy  matter  to  understand  just  why  prices  should  atart  to  rise  in 
the  fall  of  the  year  when  the  crops  are  being  moved  and  delivered  to  the  pur- 
chasers, and  conversely  why  the  price  should  fall  while  there  is  hut  a small 
available  supply  upon  the  market,  and  when  many  of  the  raw  commodities  are  as 
yet  in  the  germination  stage.  This  seasonal  cycle  may  be  explained  by  the  fact 
that  European  speculators  are  purchasing  wheat  hedges  in  the  fall  of  the  year  in 
the  American  market  against  the  crops  from  the  warmer  climates;  Argentina  and 
Australia.  The  crops  from  these  two  countries  are  harvested  at  a later  date,  and 
the  European  speculators  and  dealers  protect  themselves  by  the  purchase  of  these 
hedges.  This  serves  to  drive  the  price  of  agricultural  commodities  up  in  the 
fall  of  the  year.  The  ensuing  decline  is  occasioned  through  the  sale  of  these 
same  hedges  upon  the  delivery  and  harvesting  of  the  crops  in  Australia  and  in 
Argentina.  It  is  thus  the  financing  operations  incidental  to  the  purchase  of  the 
crops  that  occasions  this  seasonal  cycle  in  the  case  of  the  raw  commodities. 

The  prices  of  manufactured  commodities  and  general  commodities  do  not 
show  this  seasonal  cycle.  The  raw  materials  which  form  the  basis  for  the  oper- 
ations of  the  manufacturing  industry,  form  but  a fraction  of  the  cost  of  these 
commodities.  Consequently,  the  seasonal  cycles  are  lost  in  these  prices. 

The  seasonal  cycle  for  the  prices  of  stocks  is  just  the  converse  of 
the  cycle  for  the  prices  of  raw  commodities.  This  is  to  be  expected,  however, 
as  will  be  clear  from  the  explanation  which  will  follow  in  this  chapter.  The 
important  thing  to  notice  is  that  there  is  a seasonal  cycle  in  both  the  case  of 
the  prices  of  stocks  and  in  the  prices  of  raw  commodities. 

It  may  be  well  at  this  juncture  to  depart  from  a consideration  of  the 
movements  of  the  prices  of  commodities  to  examine  the  significance  of  the  close 
correlation  between  the  movements  of  the  prices  of  stocks  and  of  commodities 
with  reference  to  the  secular  trend,  the  major,  minor,  and  seasonal  cycles. 


_ 


- • 


. • 

4 


. 


■ 


4 ' 


. 

' 

* 


-68- 


As  we  have  already  noticed,  the  upward  secular  trend  of  the  prices  of 
commodities  is  due  primarily  to  monetary  and  credit  inflation.  The  relation, 
then,  between  this  trend  and  the  same  trend  in  the  case  of  the  prices  of  stocks, 
is  not  one  of  causality.  They  are  both  the  results  of  the  same  underlying  fan- 
tors.  We  cannot  affirm  that  a rising  general  level  of  commodity  prices  has 
caused  the  prices  of  stocks  to  rise  concomitantly. 

It  is  altogether  possible  that  the  major  and  minor  cyclical  movements 
in  the  case  of  commodities  are  one  step  in  the  chain  of  causality  leading  to 
these  movements  in  the  prices  of  stocks.  Business  enterprise  deals  with  both  the 
raw  and  the  finished  goods,  though,  and  if  this  same  movement  is  apparent  for 
both  prices  it  is  hard  to  see  just  how  it  is  possible  to  ascribe  the  cyclical 
movements  of  the  commodity  prices  as  a cause  for  these  same  movements  in  the 
prices  of  stocks.  If  the  prices  of  manufactured  goods  alone  showed  these  move- 
ments, then  we  might  have  one  link  in  the  causal  sequence.  We  could  proceed,  in 
this  case,  from  rising  prices  in  manufactured  goods,  to  a rising  general  level  of 
profits  and  thence  to  a rising  level  of  stock  prices.  But  when  the  prices  of  raw 
commodities  are  observed  to  make  the  same  movement  as  are  the  finished  goods,  it 
is  not  possible  to  adopt  this  line  of  reasoning.  For  at  the  same  time  that  the 
finished  goods  are  rising  in  price,  the  raw  conmodities  are  showing  the  same  rise. 
The  possibilities  for  profits  on  this  account,  then,  are  rather  remote.  It  is 
necessary  to  go  behind  the  immediate  phenomena  in  hand  in  order  to  arrive  at  a 
proper  conclusion.  All  that  can  be  affirmed  here  is  that  the  major  and  minor  cy- 
cles are  present  in  both  the  prices  of  stocks  and  in  the  prices  of  commodities, 

and  that  the  underlying  causes  lie  beneath  both  these  groups  of  phenomena. 

The  seasonal  cycle  in  the  case  of  the  prices  of  raw  commodities  may 

have  a more  direct  bearing  upon  the  prices  of  stocks  than  have  either  the  major 

or  the  minor  cycles.  In  thi3  case  the  prices  of  manufactured  goods  do  not  show 
this  movement  to  the  same  extent  as  do  the  prices  for  raw  materials,  and  the 


. 


- 


■ 


. 

i 

- 


. 


I 1 1 . • 

■ 

. 


* 


. 


. 

■ 


-69- 


movement  is  hardly  to  be  called  distinct  in  this  case.  We  find  that  the  prices 
for  raw  commodities,  under  the  seasonal  movement,  rise  where  the  prices  of  stocks 
fall,  and  fall  where  the  prices  of  stocks  rise.  This  is  as  would  be  expected, 
for  when  the  prices  of  raw  materials  advance  without  a corresponding  advance  in 
the  prices  of  manufactured  goods,  the  profits  of  business  enterprise  will  decline 
temporarily  at  least.  The  seasonal  cycle  was  also  present  in  the  case  of  the 
graphs  showing  monetary  and  banking  statistics  and  the  causal  sequence  was  traced 
out  at  this  time.  It  is  apparent  that  a part  of  this  seasonal  cyclical  movement 
in  the  case  of  the  prices  of  stocks  may  be  traced  to  this  seasonal  movement  in 
the  case  of  raw  commodities.  The  seasonal  movement  in  the  case  of  the  raw  com- 
modities may  in  turn  be  traced  to  the  conditions  in  the  agricultural  and  extrac- 
tive industries  themselves. 

There  yet  remains  one  phenomenon  in  the  case  of  the  prices  of  commodi- 
ties that  must  be  considered.  During  the  years  1898  and  1899  the  prices  of  raw 
commodities  rose  at  a faster  rate  than  the  prices  of  manufactured  goods  did.  Dar- 
ing these  two  years,  also,  the  prices  of  stocks  are  observed  to  rise.  In  the 
year  1900  we  had  a marked  and  sharp  decline  in  the  general  price  level  of  stocks. 
Thi9  decline  has  been  called  a panic  by  some  writers,  and  we  may  affirm,  at  least 
that  it  was  a very  severe  break  in  prices.  During  the  last  half  of  the  year  1901, 
the  entire  year  1902,  and  the  first  half  of  the  year  1903  we  can  again  observe 
this  same  phenomenon:  the  prices  of  raw  commodities  rising  at  a faster  rate  than 
the  prices  of  manufactured  commodities,  and  the  prices  of  stocks  rising  eenoomi- 


A 

■tant.ly.  In  the  fall  of  the  year  1904  a very  severe  crisis  occurred  and  a marked 
decline  in  the  prices  of  stocks  was  the  result.  After  the  break  in  the  prices  of 
stocks  had  occurred,  the  prices  of  raw  commodities  again  dropped  and  started  to 
move  more  in  harmony  with  the  prices  of  manufactured  commodities  as  had  also  been 
the  case  in  the  previous  occasion  mentioned.  In  the  last  part  of  the  year  1906 
and  the  first  part  of  the  year  1907  we  can  again  observe  the  same  phenomenon  that 


. 


. 


. 

1 

, 

* 

- 


-70- 

occurred  on  the  two  previous  occasions.  In  the  fall  of  1907  a memorable  panic 
occurred. 

It  is  quite  clear  that  all  this  is  not  without  its  significance.  The 
situation  is  briefly  this:  Business  enterprise  is  becoming  more  profitable  and 

is  expanding.  This  fact  is  recorded  in  the  prices  of  shares  in  business  enter- 
prise. This  expansion  in  business  is  followed  by  rising  commodity  prices,  and 
these  prices  rise  out  of  proportion  to  the  rise  in  the  case  of  the  manufactured 
commodities.  It  is  quite  clear  that  this  process  cannot  continue  forever.  Nor 
does  it  continue  for  long  in  any  instance,  for  it  is  inevitably  followed  by  a 
panic  or  crisis  which  is  recorded  in  the  severe  break  in  the  prices  of  stocks. 

We  have  here  what  some  economists  have  termed  a "maladjustment  in  the  productive 
process"*.  For  some  reason  or  other  business  enterprise  becomes  more  profitable 
and  starts  to  expand.  This  creates  a heavy  demand  for  raw  commodities,  which  is 
immediately  reflected  by  a rise  in  price  of  these  commodities.  Now  the  prices  of 
manufactured  goods,  which  are  evidently  being  turned  out  in  large  quantities,  do 
not  rise  at  the  same  rate.  It  is  from  this  fact  that  we  are  said  to  have  a con- 


*Cf.  Beveridge,  W.  H. , Unemployment:  May,  R.  E. , Das  Grundgesetz  diaJVirtschafts- 
krisen:  Hobson,  J.  A.,  The  Industrial  System.  Ch.  Ill,  XVIII;  Aftalion,  A.,  Essai 
d*a»  theorie  des  crises  generales  et  periodique;  Bottniatian,  M. , Studien  zur 
Theorie  und  Geschichte  du  Wirtschaftkrisen.  Vol.  I;  Spiethoff,  A.,  In  Schmoller' s 
Jahrbuch  1902,  pp  721-759,  1903,  pp  679-708,  1909  pp  445-467,  927-951,  1417-1437; 
Hull,  G.  H, , Industrial  Depressions;  Lfcsctuo^  J. , Des  crises  generales  et  perio- 
dique  de  surpro  duct  ion,  pp  496-522;  Veblen,  T.  B. , Theory  of  Business  Enterprise: 
Seligman,  E.  R.  A.,  The  Currency  Problem  and  the  Present  Financial  Situation 
(Introduction);  Sombajrt,  W. , Die  Stonafeen  im  Deutschen  Wirtschaftsleben.  in 
Schriften  des  Vereins  fur  Socialpolitik.  Vol.  113,  pp  130-133;  Carver,  T.  N. , 

A Suggestion  for  a Theory  of  Industrial  Depression.  Q.J.E.  May  1903. 

These  various  authors  cited  do  not  all  ascribe  the  crisis  to  a "maladjust- 
ment in  the  productive  process"  but  some  variation  of  this  general  idea  is  at  the 
basis  of  them  all.  This  expression  is  interpreted  in  many  different  ways  as  can 
be  seen  from  an  examination  of  these  citations. 


-71- 


dition  of  "overproduction" , or  bettor,  "maladjustment  in  the  productive  process". 
This  maladjustment  has  been  blamed  for  many  of  the  crises  that  we  have  experi- 
enced. It  has  even  been  advanced  by  some  authors  as  a fundamental  cause  of  pan- 
ics. It  is  quite  clear  that  we  cannot  affirm  any  one  thing  as  a fundamental 
cause  of  panics  because  of  the  great  complexity  of  economic  organization.  It  is 
quite  clear,  however,  that  this  maladjustment  in  production  does  play  a part  in 
the  business  cycle  movement,  as  can  easily  be  seen  from  an  examination  of  these 
graphs. 

Thus  it  is  that  movements  in  the  various  types  of  commodities,  princi- 
pally the  raw  and  manufactured,  when  they  can  be  observed  to  move  relatively  in 
different  directions  or  at  a different  rate  of  speed  in  the  same  direction,  are 
a part  of  the  causal  nexus  underlying  changes  in  the  general  price  level  of 
stocks.  They  are  not  the  final  or  the  complete  answer  to  any  of  these  movements, 
but  they  play  a part,  and  a very  definite  one,  the  sequence  of  which  has  already 
been  traced. 

There  appears  to  be  nothing  more  of  significance  between  the  movements 
of  the  prices  of  stocks  and  the  prices  of  commodities,  and  the  conclusion  and 
summary  of  the  results  of  this  chapter  follow: 

Conclusion  and  Summary: 

1.  That  the  movements  characteristic  of  the  general  price  level  of 
stocks  are  also  characteristic  of  the  prices  of  raw,  general,  and  manufactured 
commodities,  but  that  there  is  no  reason  for  affirming  causal  connection  between 
these  two  groups  for  all  these  movements. 

2.  That  the  secular  trend  in  both  the  case  of  the  prices  of  stocks  and 
of  commodities  is  occasional  to  a certain  extent  by  monetary  and  credit  infla- 
tion, and  that  there  is  no  causal  sequence  between  commodity  and  stock  prices  as 
far  as  this  movement  is  concerned. 

3.  That  the  major  and  minor  cycles  in  both  cases  are  occasioned  by  an 


-72- 


underlying  causal  nexus,  and  that  there  is  no  connection  he  tween  commodity  prices 
and  the  prices  of  stocks  as  far  as  these  movements  are  concerned. 

4.  That  the  evidence  of  the  graphs  points  strongly  towards  the  fact  of 
a causal  relation  between  the  seasonal  cycles  in  the  case  of  the  raw  commodities 
and  the  general  price  level  of  stocks,  the  sequence  travelling  from  raw  commodity 
prices  to  prices  of  stocks. 

5.  That  there  is  a certain  element  of  truth  in  the  various  theories  of 
crises  and  panics  which  attempt  to  account  for  the  phenomenon  by  an  appeal  to 
"overproduction"  or  to  a "maladjustment  in  the  productive  process"  or  to  some 
variation  of  this  general  thesis,  but  that  this  fact  cannot  be  ascribed  as  the 
sole  or  the  final  cause,  but  merely  as  one  important  cause  in  a complex  nexus. 


•-  . '.4vi  . o • , 


‘ 


-73- 


CHAPTER  VIII.  THE  GENERAL  PRICE  LEVEL  OF  STOCKS  AND 
CROP  PRODUCTION 

The  annual  production  of  the  following  crops  in  the  United  States  has 
"been  plotted  upon  one  chart  under  the  heading  of  "Crop  Production".  These  crops 
are:- 

1.  Wheat  - plotted  in  terns  of  "bushels 

2.  Com  - plotted  in  terms  of  bushels 

3.  Oats  - plotted  in  terras  of  bushels 

4.  Potatoes  - plotted  in  terms  of  bushels 

5.  Cotton  - plotted  in  terms  of  bales 

This  chart  will  be  found  appended  to  this  study  and  a discussion  of  the  nature 

a/JL. 

and  source  of  the  data  will  be  found  in  Appendix  A.  Since  all  of  this  data  4rs~ 

plotted  in  terms  of  bushels  or  bales  it  is  free  from  the  direct  influence  of 

money  and  credit.  -I-t-'  is  not  plotted  in  prices  and  hence  variations  in  the  amount 

A 

of  credit  and  money,  and  variations  in  the  velocity  of  circulation  of  credit  and 
money,  will  not  be  recorded  in  this  data.  The  movements  which  these  graphs  will 
be  observed  to  make  cannot,  therefore,  be  ascribed  to  the  direct  action  of  the 
quantitative  law.  The  characteristic  movements  of  these  monetary  indices  will  be 
found  in  chapter  IV. 

The  problem  of  this  chapter  is  to  attempt  to  correlate  the  movements  of 
the  data  in  the  case  of  crop  production  with  the  movements  of  the  general  price 
level  of  stocks.  The  data  for  crop  production  is  annual  in  character,  and  for 
this  reason  a very  close  correlation,  especially  for  the  smaller  movements  is  not 
possible.  The  separation  of  the  movements  into  classes,  which  has  been  followed 
in  some  of  the  chapters  will  not  be  made  here,  as  it  would  obscure  rather  than 
clarify  the  analysis  and  discussion. 


-74- 

All  of  the  data  for  the  crop  production  shows  a well  marked  upward  secu- 
lar trend.  All  of  the  data,  save  that  for  corn  and  potatoes,  shows  hoth  the  majoi 
and  the  minor  cycle.  Com  and  potatoes,  in  some  periods  show  a minor  cycle,  hut 
this  movement  is  not  so  persistent  as  it  is  in  the  case  of  the  other  crops.  The 
seasonal  cycle  cannot  he  detected  for  any  of  the  data  of  crops,  because  the  data 
is  annual  in  character  and  this  movement  is  hence  obscured.* 

In  general  the  movements  that  the  data  of  crop  production  make  are  in 
accord  with  the  movements  of  similar  character  made  by  the  general  price  level  of 
stocks.  The  correlation  cannot  be  called  close,  by  any  means,  but  it  is  easily 
distinguished  and  can  be  seen  at  a glance.  The  correlation  is  hindered  by  reason 
of  the  fact  that  we  are  dealing  with  monthly  data  in  the  case  of  the  prices  of 
stocks  and  annual  data  in  the  case  of  crop  production. 

Since  the  data  for  crops  is  not  measured  in  terms  of  price  we  cannot 
ascribe  changes  in  monetary  and  banking  conditions  as  occasions  operating  direct- 
ly upon  these  movements.  Monetary  and  banking  conditions  may  be  an  indirect 
cause,  and  they  doubtless  play  their  part,  but  they  cannot  be  said  to  operate  di- 
rectly upon  the  movements  of  the  data  for  crop  production.  We  must  look  to  other 
sources  for  our  explanation  of  these  phenomena. 

It  is  difficult  to  attempt  to  trace  any  causal  sequence  between  these 
characteristic  movements  in  the  case  of  crop  production  and  in  the  case  of  the 
prices  of  stock.  Yet  there  is  a connection,  although  it  may  be  held  to  be  but 
an  indirect  one,  and  this  connection  is  real.  The  sequence  in  this  case  proceeds 
from  crop  production  to  the  general  price  level,  for  the  general  level  of  stock 
prices  is  affected  by  the  condition  of  the  crops  to  a much  greater  extent  than 
is  the  condition  of  the  crops  by  the  prices  of  stocks.  The  effect  of  crop  pro- 

*We  have  here  another  illustration  of  the  desirability  of  using  monthly  data 

wherever  it  is  possible.  A very  interesting  comparison  is  lost  here,  because  of 

the  fact  that  it  was  not  possible  to  obtain  monthly  data  for  the  period  under 
.consideration.  


-75- 

duction  upon  the  general  price  level  of  stocks  may  he  traced  along  two  different 
lines. 

In  the  first  place  a good  harvest,  a "bumper  crop”,  is  a source  of  new 
wealth.  It  represents  an  addition  to  the  wealth  of  the  country.  This  addition 
of  new  wealth  differs  from  additions  to  new  wealth  through  other  kinds  of  indus- 
tries in  that  we  have  a very  rapid  addition  to  the  wealth  of  the  country  in  a 
relatively  short  time  in  the  case  of  agriculture  whereas  in  the  other  industries 
the  addition  to  the  wealth  is  a much  more  gradual  process.  The  temporal  element 
in  the  case  of  agriculture  is  small  relative  to  the  element  of  quantity.*  This 
is  not  true  in  the  other  types  of  industries.  This  addition  to  the  stock  of 
wealth  means  a greater  exchange  power,  a greater  purchasing  power,  to  the  country 
It  does  not  always  mean  an  increased  purchasing  paver  to  the  agricultural  classes 
ho wever.  This  addition  to  the  purchasing  power  means  an  addition  to  the  supply 
of  goods  as  well,  and  so  we  cannot  affirm  that  the  general  price  level  would 
thereby  he  raised**.  The  effect,  however,  upon  the  condition  of  business  is 
quite  marked,  because  the  new  crop  represents  an  increase  in  the  sum  total  of 
wealth,  and  from  the  effect  upon  the  business  optimism  of  the  time.  Agricultur- 
al crop  production  also  has  an  indirect  influence  upon  the  condition  of  business 
enterprise  that  is  exercised  by  the  effect  of  bad  and  good  crops  upon  the  credit 
and  banking  fabric  of  the  country.  This  new  addition  to  wealth  forms  the  basis 
of  credit  extensions.  It  increases  the  deposits  in  the  banks  and  forms  the  basis 
for  new  extensions  of  credit  to  both  farmers  and  other  enterprisers.  This  serves 
to  improve  the  condition  of  business  enterprise,  by  granting  more  credit  at  a 
lower  rate.  In  this  way,  also,  prices  are  advanced,  and  it  is  possible  for  en- 


*Cf.  In  this  connection  the  writings  of  the  Physiocrats,  especially  Du  Pont, 
Quesnay,  de  Gournay,  Turgot,  and  Mjfeier  de  la  Riviere. 

♦♦Gregory  King's  law  is  of  interest  in  this  connection.  He  affirmed  that  small 
changes  in  the  supply  of  agricultural  commodities  produced  very  large  changes  in 
tne  prices  of  these  same  commodities* 


-76 


terprisers  to  enjoy  a higher  rate  of  profit  upon  their  investments.  When  crops 
are  not  good,  this  situation  does  not  prevail.  Many  of  the  farmers  cannot  pay 
their  loans;  they  must  be  either  carried  by  the  banks,  or  else  the  banks  must 
force  them  to  pay  by  foreclosure  and  bankruptcy.  The  assets  of  many  banks  tend 
to  become  "frozen”,  and  often  some  banks  are  forced  into  failure.  This  operates 
so  as  to  reduce  the  deposits  in  banks,  to  reduce  the  amount  of  credit  granted  by 
them.  This  has  a deadening  effect  upon  business  enterprise  in  that  it  curtails 
credit  extensions,  and  also  in  that  it  tends  to  lower  prices.  In  this  way  crop 
production  has  a somewhat  indirect,  but  nevertheless  a very  real,  effect  upon 
business  enterprise,  and  consequently  upon  the  general  price  level  of  stocks. 

An  abundant  harvest  also  means  that  people  have  more  of  the  essentials, 
it  means  that  "times  are  good",  and  it  means  that  popular  optimism  is  keyed  to  a 
higher  pitch.  This  effect  of  good  harvests  has  long  been  noted,  but  the  sequence 
has  never  been  accurately  traced  out.  We  often  say  that  the  "psychological  ef- 
fect" a good  harvest  promotes  business  prosperity.  This  means  that  we  do  not 

know  just  how  it  works,  how  the  sequence  runs,  but  we  know  that  it  does.  Bad 
harvests,  bad  crop  production,  means  precisely  the  opposite  of  this  analysis.  It 
means  a smaller  supply  of  wealth  and  a consequent  business  pessimism  resulting  in 
what  we  call  poorer  business  and  less  entrepreneur  prosperity. 

This  last  analysis  shows  the  effect  of  the  production  of  crops  upon  the 
general  price  level  of  stocks  by  first  changing  the  condition  of  business  enter- 
prise. Since  the  prices  of  stocks  reflect  the  condition  of  business  enterprise, 
anything  that  tends  to  affect  business,  will  in  turn  affect  the  prices  of  stocks. 
But  the  prices  of  stocks  are  affected  by  crop  production  in  yet  another  way.  The 
traders  on  the  stock  exchange  are  sensitive  to  what  they  term  the  "fundamental 
conditions".  The  production  of  crops  is  such  a fundamental  condition.  Advance 
crop  reports  will  be  reflected  directly  in  the  "tone"  of  the  market.  A favorable 
advance  report  will  operate  upon  the  minds  of  the  buying  interests  so  as  to  in- 


- . • • 


- : 


■ : 


. ' ■ '■ 


• •’ 


: ••• 


. 

■ 


: 1 


-77- 


duce  them  to  offer  higher  prices  for  stocks.  It  will  operate  -upon  the  minds  of 
the  selling  interests  so  as  to  induce  them  to  hold  the  stocks  which  they  have, 
and,  possibly,  to  buy  more  stock.  An  unfavorable  advance  report  will  tend  to 
occasion  more  selling,  completed  selling  and  short  selling.  In  this  way  crop 
production  tends  to  influence  the  general  price  level  of  stocks  by  operating  up- 
on the  judgments  of  stock  traders  and  inducing  them  to  "bull”  or  "bear"  the  mar- 
ket. Also,  through  the  medium  of  the  advance  crop  reports,  the  stock  market  is 
often  able  to  form  a judgment  in  advance  of  the  actual  harvest,  and  the  prices 
of  stocks  thus  tends  to  reflect  the  condition  of  business  enterprise  as  it  is 
thought  to  be  in  the  future. 

There  remains  one  other  point  of  interest  in  connection  with  the  indi- 
ces of  crop  production.  There  are  four  marked  depressions  in  the  prices  of  se- 
curities. The  first  is  the  memorable  crisis  of  1893.  The  second  is  the  depres- 
sion occurring  in  the  year  1900.  The  third  is  the  crisis  of  1903  and  1904,  and 
the  fourth  is  the  "stock  exchange"  or  "money  market  panic"  of  1907.  It  is  inter- 
esting to  note  that  before  each  one  of  these  declines  in  the  prices  of  stocks, 
some  of  which  were  quite  severe  and  rapid,  there  had  been  a very  perceptible 
falling  off  in  the  production  of  crops.  During  the  two  years  preceding  the  panic 
of  1893  there  had  been  a steady  decline  in  the  production  of  all  the  crops  except 
cotton  and  potatoes,  and  cotton  and  potatoes  declined  in  1891,  and  recovered  but 
slightly  during  1892.  Prior  to  the  decline  in  1900  there  had  been  two  years  of 
relatively  small  crops.  The  year  1902,  just  prior  to  the  panic  of  the  following 
year  is  a year  of  relatively  small  crops.  The  year  1906,  just  preceding  the  panic 
of  the  following  year,  is  one  of  a shrinkage  in  the  production  of  crops.  There 
is  nothing  new  in  this  phenomenon  for  many  writers  on  business,  trade,  and  com- 
merce have  called  attention  to  it*.  This  has  led  some  writers  to  ascribe  either 

*Scott,  W.  R. , Joint  Stock  Companies  to  1720,  vol.  I.  The  depressions  and  panics 
from  1553  to  1720  in  England  are  discussed.  Bad  crops  are  a concomitant  of  most 
of  them. 


* 


. 


. 

. 


' 

. 


■ 


. 


. 


■ ' • • 

■ 


-78- 

bad  harvests  or  natural  agents  affecting  the  harvests  as  "being  the  cause  of  busi- 
ness depressions  and  panics*.  These  theories  also  ascribe  a certain  periodicity 
to  crises.  While  there  is  nothing  in  any  of  the  descriptions  of  these  theories 
that  will  go  to  prove  that  bad  crops  are  a final  cause  in  the  sequence  nor  that 
there  is  any  regular,  ascertainable,  periodicity  in  the  economic  crises,  it  must 
be  affirmed  that  crop  production  is  a part  of  the  story.  The  fact  that  crop  pro- 
duction exerts  an  influence  upon  the  condition  of  business  enterprise  and  that  it 
affects  the  general  price  level  of  stocks  serves  to  show  that  it  is  possible  for 
a bad  harvest  to  be  one  of  the  factors  which  assist  in  bringing  on  a crisis.  Crop 
production,  also,  affects  the  condition  of  credit  and  banking,  and  in  this  way 
serves  to  affect  the  situation  underlying  the  crisis.  The  monetary  and  banking 
indices  show  this  effect**.  If  the  condition  of  business  enterprise  is  sound, 
then  a bad  harvest  would  not  be  likely  to  precipitate  a crisis,  but  if  the  condi- 
tion is  otherwise,  a bad  harvest  might  not  only  precipitate  a crisis,  but  it  might 
also  add  considerably  to  its  severity.  This  thesis  does  not  attempt  to  defend 
any  single  theory  for  the  business  cycles  nor  for  any  hard  and  fast  rule  for  per- 
iodicity, although  the  movements  are  distinctly  periodic,  but  it  must  be  affirmed 
that  crop  production  is  an  important  factor  underlying  the  condition  of  business 


*Cf.  Jevons,  W.  S. , Investigations  in  Currency  and  Finance.  The  theory  advanced 
in  this  work  has  become  almost  a classic  in  the  science  of  economics.  It  is 
known  as  "Jevons’  Sun  Spot  Theory”.  Jevons  affirms  that  crises  are  caused  by  bad 
harvests,  which  in  turn  are  caused  by  an  insufficient  amount  of  solar  heat.  Jevons 
noticed  that  the  periodicity  of  the  sun  spots  was  similar  to  the  periodicity  of 
the  economic  crises,  and  henc3  concluded  that  the  crises  were  caused  by  the  fact 
that  the  sun  spots  faced  the  earth  and  afforded  less  heat  for  the  graving  crops. 
This  caused  a crop  shortage  and  a consequent  crisis.  This  theory  is  interesting, 
also,  from  the  point  of  view  of  scientific  method.  The  method  employed  in  this 
study  is  the  same  that  Jevons  employed,  namely,  concomitant  variations.  His  the- 
ory illustrates  the  error  into  which  one  is  able  to  fall  through  a careless  use 
in  this  method.  There  are  some  other  writers  who  affirm  the  periodicity  and  the 
cause  of  crises  to  bad  harvests  and  the  agencies  of  weather,  etc.,  which  occasion 
bad  harvests.  See  also  Carr,  N.  T.,  The  Sun;  Its  Constitution:  Its  Phenomena: 

Its  Condition.  Carrington,  E.  C. , Observations  on  the  Spots  on  the  Sun  from  No- 
vember 9,  1853,  to  March  24,  1861.  Haxen,  H.  A. , Sun  Spots  and  Predictions  in 
Science.  Herschel,  Sir  Wm.  Observations  Tending  to  Investigate  the  Nature  of 


- - — • . _ 


-79- 


enterprise  and  that  crop  production  has  played  an  important  part  in  the  several 
crises  and  depressions  noted.  The  effect,  then,  of  crop  production  upon  the  cri- 
ses, as  indicated  by  the  general  price  level  of  stocks  is  pronounced,  and  they 
are  a part  of  the  causal  nexus  underlying  this  phenomena. 

The  principal  conclusions  of  this  chapter  are: 

1.  That  the  secular  trend,  the  major  cycle,  and  the  minor  cycle,  are 
found  in  the  indices  of  crop  production  in  very  much  the  same  way  that  they  were 
found  in  the  case  of  the  indices  of  the  prices  of  stocks. 

2.  That  there  is,  to  some  extent, a causal  sequence  between  the  produc- 
tion of  the  various  crops  and  the  general  price  level  of  stocks  and  that  sequence 
is  somewhat  as  follows: 

(a)  By  operating  so  as  to  increase  or  decrease  the  total  amount  of  wealth  in 
a country,  and  thus  altering  the  condition  of  business  enterprise,  and  hence  al- 
tering the  general  price  level  of  stocks. 

(b)  By  operating  so  as  to  increase  or  to  decrease  the  amount  of  credit  which 
banks  and  other  institutions  are  able  to  extend,  and  also  by  operating  upon  the 
stability  and  liquidity  of  these  institutions. 

(c)  By  so  altering  the  frame  of  mind  of  business  enterprisers  so  as  to  in- 
duce them  to  expand  or  to  contract  their  projects. 

(d)  I^y  altering  the  frame  of  mind  of  stock  traders,  through  the  medium  of 
advance  crop  reports,  and  thus  giving  buoyancy  to  stock  values  or  depressing 
these  values.  In  this  way  crop  production  operates  directly  upon  the  general 
level  of  stock  prices,  which  reflect  the  putative  condition  of  the  crops  at  some 
time  in  advance, 

the  Sun,  etc.  Hunter,  W.  W. , and  Locklear,  J.  N, , Sun  Spots  and  Famines,  in  the 
Nineteenth  Century  for  Nov.  1877.  Kedzie,  J.  H. , Speculations.  Solar  Heat. 
Gravitation,  and  Sun  Spots.  Beveridge,  W.  H.,  in  the  March  and  June,  1920  issues 
of  the  Economic  Journal.  Wallace,  A.  B.,  Bad  Times.  Young,  A.  C.,  The  Sun  and 
the  Phenomena  of  its  Atmosphere,  in  Half  Hours  with  Modem  Scientists. 


**Cf.  Chapter  V. 


-eo- 


3.  That,  while  had  harvests  cannot  he  accounted  as  the  cause  of  eco- 
nomic crises,  nor  as  the  factor  alone  lending  them  any  such  periodicity  that 
they  might  he  found  to  possess,  they  have  been  a part  of  the  crises  of  1893, 
1900,  1903-04,  and  1907,  and  that  the  several  theories  that  attempt  to  account 
for  crises  hy  harvests  have  some  elements  of  truth  in  them,  hut  they  have  ne- 
glected many  other  important  factors,  and  consequently,  do  not  tell  the  whole 
story. 


-81- 


CKAPTER  IX.  THE  GENERAL  PRICE  LEVEL  OF  STOCKS  AND  TRADING 
ON  THE  STOCK  EXCHANGES. 

Appended  to  this  study  there  will  be  found  a chart  with  two  graphs 
plotted  upon  it.  The  chart  is  labelled  "Stock  Exchange  Trading  Group"  and  two 
graphs  are  composed  of  the  following  series  of  data:- 

1.  Volume  of  Sales  on  the  New  York  Stock  Exchange 

2.  Total  Clearings  of  Securities  on  all  Stock  Exchanges  in  the  United  States 
A discussion  of  the  nature  and  source  of  the  data  used  in  making  these  indices 
will  be  found  in  Appendix  A.  The  data  for  the  volume  of  sales  on  the  New  York 

O/JL 

Stock  Exchange  4*- recorded  in  terms  of  number  of  shares  bought  and  sold.  The  da- 
ta  for  the  total  clearings  of  securities  on  all  stock  exchanges  ^4-s- re  corded  in 
terms  of  dollars.  It  is  the  purpose  of  this  chapter  to  compare  and  correlate  the 
movements  of  the  graphs  indicating  the  trading  activity  on  the  stock  exchanges 
with  the  graphs  showing  the  general  price  level  of  stocks. 

The  movements  of  both  indices  indicating  the  activity  of  trade  on  the 
stock  exchanges  are  very  similar  to  those  made  by  the  graphs  indicating  the  gener- 
al level  of  prices.  The  graph  of  the  volume  of  sales  on  the  New  York  Stock  Ex- 
change appears  to  move  in  closer  harmony  with  those  showing  the  prices  of  stocks 
than  does  the  graph  of  the  clearings  of  securities  on  all  exchanges.  This  is  to 
be  expected,  however,  because  the  indices  of  the  prices  of  stocks  was  made  from 
price  data  on  the  New  York  Stock  Exchange.  Both  indices  of  stock  trading  show 
the  secular  trend,  the  major  cycle,  the  minor  cycle,  and  the  seasonal  cycle. 

These  movements  are  clearer  for  the  graph  showing  volume  of  sales  on  the  New  York 
Stock  Exchange,  and  the  dispersion  in  the  case  of  this  data  is  also  probably 
greater. 

This  correlation  means  that  as  the  general  price  level  of  stocks  ad- 
vances the  trading  in  stocks  increases,  and  as  the  general  price  level  of  stocks 


-82- 


declines,  the  trading  in  them  declines.  No  causal  relation  can  he  affirmed  be- 
tween these  correlations,  and  all  that  one  is  justified  in  saying  is  that  the  gen- 
eral price  level  of  stocks  and  the  volume  of  trainig  on  the  exchanges  vary  direct- 
ly. We  cannot  explain  a high  level  of  stock  prices  by  the  fact  that  there  is  a 
larger  volume  of  trainig.  taking  place  at  this  time,  we  cannot  say  that  there  is 
more  buying,  because  every  transaction  on  the  exchanges  is  a completed  purchase 
and  sale,  and  for  the  same  reason,  we  cannot  affirm  that  low  prices  are  the  re- 
sults of  a small  amount  of  trading.  It  is  apparent  that  the  explanation  of  the 
movements  of  the  general  price  level  of  stocks  is  at  the  same  time  an  answer  to 
the  amount  of  trading  taking  place. 

In  periods  of  increasing  business  activity,  there  is  an  increasing  buoy- 
ancy in  trade.  This  is  manifested  upon  the  stock  exchanges  in  just  the  same  man- 
ner that  it  is  manifested  in  other  lines  of  business  activity.  When  the  general 
price  level  of  stocks  rises  or  falls,  it  is  indicative  of  a change  in  the  condi- 
tion of  business  enterprise.  When  the  general  price  level  of  stocks  rises  or  falli 
the  volume  of  sales  and  the  value  of  the  amount  of  shares  cleared  rises  and  falls 
likewise.  A rising  amount  of  shares  cleared,  and  a rising  amount  of  trading  in 
shares,  indicates  that  this  phase  of  business  enterprise  is  expanding.  A falling 

amount  of  volume  of  sales  and  shares  cleared  indicates  that  this  phase  of  business 

/ 

enterprise  is  declining.  Here  the  general  price  level  of  stocks  is  affirmed  as 
an  index  of  the  quantitative  aspects  of  business  enterprise  ss  shown  by  indices 
of  the  trading  in  securities. 

The  amount  of  shares  traded  and  cleared  on  the  stock  exchanges  are  con- 


ditioned, to  a certain  extent,  by  the  condition  of  the  money  market.  In  times  of 
stringency  it  is  not  so  easy  to  obtain  money  for  speculative  purposes.  The  rate 


for  call  loans  advances,  and  trading  becomes  a more  expensive  operation.  This 
tends  to  check  speculation.  Times  of  monetary  ease  tend  to  stimulate  trading  and 
speculation  upon  the  stock  exchanges.  The  indices  of  trading  are  fairly  reliable 


-83- 

indices  of  the  condition  of  business  enterprise  from  the  point  of  view  of  banking, 
and  since  the  movements  that  these  indices  make  find  their  counterpart  in  the  move- 
ments that  the  indices  of  the  general  price  level  of  stocks  makes,  these  prices  of 
stocks  are  further  confirmed  as  an  index  of  the  condition  of  business  enterprise. 

There  are  many  points  of  interest  in  connection  with  the  trading  upon  the 
stock  exchanges.  It  would  be  interesting  to  study  the  different  methods  of  trading 
to  study  the  effects  of  trading  upon  corporate  development  and  upon  the  financial 
organization  of  society.  Unfortunately,  a discussion  of  these  matters  is  beyond 
the  scope  of  this  discussion,  and  we  must  remain  satisfied  with  the  bare  results 
of  the  correlation  between  the  movements  of  the  indices  of  trading  upon  the  stock 
exchange  and  those  of  the  prices  of  stocks*. 

The  conclusions  of  this  chapter  are  as  follows: - 

1.  That  the  indices  showing  the  volume  of  trading  upon  the  stock  exchanges 

of  the  United  States  show  the  secular  trend,  the  major,  minor,  and  seasonal  cycles, 
tn  essentially  the  same  manner  that  these  movements  are  manifest  for  the  indices 
of  the  general  price  level  of  stocks. 

2.  That  this  fact  of  correlation  affirms  that  the  general  price  level  of 
stocks  is  a good  index  of  the  condition  of  business  enterprise  from  the  quantita- 
tive point  of  view  of  amount  of  trading,  and  also  indirectly  from  the  point  of 
view  of  credit  and  banking. 

3.  That  it  is  through  trading  in  shares  that  fluctuations  in  the  prices  of 

stocks  occur,  but  that  trading  is  in  no  sense  a fundamental  cause  of  the  movements. 

♦The  reader  is  referred  to  the  bibliography  appended  to  this  study  for  material  up- 
on stock  exchange  trading,  investment,  speculation,  etc.  Some  of  the  more  impor- 
tant works  dealing  with  the  American  exchanges  are:  Pratt,  S.S.,  The  ?.Tork  of  Wall 
Street;  Clews,  H.,  Twenty  Eight  Years  in  Wall  Street;  Babson,  R.  W.,  Bonds  and 
Stocks;  Crump,  A.,  The  Theory  of  Stock  Speculation;  Emery,  H.  C.,  Speculation  upon 
the  Stock  and  Produce  Exchanges  of  the  U.S.;  Conant,  C.  A.,  Wall  Street  and  the 
Country;  England,  Minnie  T.,  On  Speculation  in  Relation  to  the  Worlds  Prosperity, 
1897-1903;  Gibson.  T.,  The  Elements  of  Speculation;  Nelson,  S.A.,  The  A.B.C.  of 
Stock  Speculation. 


- 

. 


-84- 


CHAPTER  X.  PSYCHOLOGICAL  FACTORS  AND  THE  GENERAL 
PRICE  LEVEL  OP  STOCKS 

The  term  "psychological  factors"  has  teen  applied  to  news  items,  rumors, 
important  events,  judicial  decisions,  etc.,  which  are  often  said  to  have  an  im- 
portant bearing  upon  the  prices  of  stocks.  The  purpose  of  this  chapter  is  to 
study  these  factors  in  relation  to  the  general  price  level  of  stocks,  and  to  see 
just  what  effect  they  have  had  upon  it.  It  was  not  thought  wise  to  summarize  all 
of  these  factors  in  an  appendix,  but  to  set  down  in  this  chapter  such  factors  that 
seem  to  have  had  an  important  effect,  and  to  examine  closely  the  nature  of  this 
effect  and  the  conditions  under  which  it  was  brought  about.  Important  psychologi- 
cal factors  that  do  not  appear  to  have  had  any  effect  upon  the  general  price  level 
of  stocks  will  also  be  mentioned  and  discussed. 

The  nature  and  source  of  these  various  items  are  discussed  in  Appendix 
A.  In  this  appendix  there  is  also  briefly  discussed  the  manner  in  which  these 
factors  are  said  to  operate,  and  the  conditions  under  which  they  will  operate. 

The  plan  of  this  chapter  differs  from  that  of  its  predecessors.  The 
psychological  factors  will  be  compared  with  the  general  price  level  of  stocks 
from  the  beginning  of  the  indices  to  the  end.  The  discussion  will  be  taken  up  by 
periods,  beginning  with  the  year  1890  and  ending  with  the  year  1917,  rather  than 
by  movements,  as  was  done  in  the  previous  chapters. 

1890-1893 

During  this  period  we  have  one  conplete  minor  cycle.  During  the  first 
few  months  of  the  year  1900  we  have  rising  values  of  stock  prices  in  the  face  of 
rather  adverse  news.  Several  corporations  passed  dividends  and  failed  to  make 
payments  of  interest.  There  was  some  trouble  in  financial  circles,  especially 
with  the  Sixth  National  Bank  in  New  York.  In  April,  the  reserves  of  the  New  York 
banks  were  reported  as  low.  In  spite  of  all  these  reports,  the  tone  of  the  New 


-85- 


York  stock  market  was  reported  as  buoyant.  In  April  the  general  price  level  of 
railroad  stocks  started  to  decline  and  in  August  the  other  corporation  stock  pri- 
ces followed.  In  July  the  agricultural  crop  report  was  held  to  be  favorable.  In 
August  the  news  items  reported  a money  panic,  due  to  the  shortage  of  reserves  in 
the  New  York  City  banks.  This  condition  was  reported  the  following  morftfc.as  eas- 
ier. The  Baring  crisis  in  London  and  the  defeat  of  the  Republicans  in  the  Novem- 
ber elections  were  held  to  be  factors  contributing  to  the  decline.  In  November 
the  general  price  level  of  stocks  is  at  its  lowest  point  for  both  railroad  and 
other  shares,  and  from  this  point  on  we  have  the  upward  trend  of  this  minor  cycle 
Daring  the  early  parts  of  the  year  1891,  the  tone  of  the  stock  exchange  was  re- 
ported as  buoyant.  The  rise  in  this  phase  of  the  minor  cycle  was  not  a steady 
one  by  any  means.  During  these  early  months  the  gold  exports  were  rather  large, 
but  the  United  States  started  to  import  gold  beginning  in  September.  The  July 
crop  reports  were  reported  as  good,  and  from  this  point  on  the  rise  in  the  upward 
phase  of  this  minor  cycle  became  more  pronounced. 

1893-1899 

This  period  covers  one  complete  minor  cycle.  This  minor  cycle  includes 
the  panic  of  1893,  which  was  severe  and  of  prolonged  duration.  During  the  year 
1892  the  general  price  level  of  railroad  stocks  declined,  and  the  general  price 
level  of  other  stocks  rose.  This  cycle  may  be  said  to  be  composed  of  three  phas- 
es. The  first  phase,  a decline,  began  in  January  1893.  This  decline  persisted 
until  August  of  the  same  year.  The  second  phase  of  the  panic  began  then  at  this 
point;  and  we  had  a prolonged  period  of  depression  during  which  time  the  general 
price  level  of  both  railroad  and  other  stocks  was  at  a very  low  point.  This 
period  of  depressions  lasts  until  June,  1897.  After  this  month  was  reached  the 
third  phase  of  the  minor  cycle  began.  This  phase  was  a period  of  rising  values 
for  the  prices  of  stocks  and  it  culminated  in  October,  1899* 


” 


. ' 


- 


■ • 


. 


- 


• ■ 0 . 


. 


-66- 


The  year  18S2  waa  characterized  by  a number  of  interesting  events.  In 
the  first  place,  the  free  silver  bill  was  Tip  for  discussion,  but  wa3  not  settled 
at  this  time.  The  money  market  tone  was  reported  uniformly  throughout  this  year 
as  "easy".  In  September  of  this  year  the  cholera  "scare"  was  held  to  have  been 
the  cause  of  the  very  small  decline  in  the  prices  of  stocks  that  took  place  at  this 
time.  The  movement  that  this  "scare1'  is  said  to  have  been  the  cause  is  scarcely 
appreciable,  and  in  no  way  differs  from  the  ordinary  month  to  month  variation  that 
the  general  price  level  of  stocks  appears  to  make.  The  election  of  Cleveland  to 
the  Presidency  did  not  appear  to  have  any  appreciable  effect  upon  the  stock  market 
in  November.  During  the  great  decline  in  the  prices  of  stocks  that  took  place 
early  in  the  year  1893,  the  news  items  reported  that  there  were  very  large  and 
continued  exports  of  gold,  and  that  the  treasury  gold  stock  was  rapidly  being  de- 
pleted. At  the  same  time  there  appeared  to  be  much  distress  in  financial  circles 
with  many  bank  failures,  especially  in  the  West.  There  were  also  many  business 
failures  at  this  time.  When  the  first  phase  of  this  cycle  ended,  the  tone  of  the 
money  market  was  reported  as  being  greatly  improved.  The  silver  purchase  repeal 
bill  was  signed  in  November,  and  this  appeared  to  have  exercised  a salutory  effect 
on  the  money  market.  During  the  first  year  of  the  second  phase  of  this  panic, 

1894,  there  were  no  events  of  striking  importance  that  took  place.  Trading  upon 
the  stock  exchanges  appeared  to  be  irregular  and  rather  quiet.  Business  wa3  re- 
ported as  depressed.  In  1895  the  Morgan-Belmont  syndicate  was  closed  and  this  ap- 
peared to  lend  a greater  support  to  the  money  market,  which  was  reported  a3  being 
perceptibly  easier.  Abroad,  political  and  financial  conditions  appeared  to  be 
rather  disturbing  and  this  is  reported  as  aiding  the  depressed  condition  of  the 
money  market  and  of  the  stock  exchange  at  this  time.  Heavy  gold  exports  continued 
during  this  year.  A temporary  reaction  towards  higher  prices  occurred  during  this 
year,  but  it  was  of  short  duration.  The  year  1896  was  one  of  uneasiness  in  finan- 
cial circles  due  to  the  question  of  free  silver  and  the  prospective  Presidential 


. 


' 


. 


• 

• 

* 

- • 

. 

‘ 

. 

* 

' 


* 


. 


. 


-87- 


election  at  this  time.  When  Bryanf  was  defeated  in  November  of  this  year,  the  tone 
in  both  stock  exchange  and  financial  circles  was  reported  as  improved.  In  1897 
the  psychological  factors  appear  to  be  improving  in  tone,  that  is,  to  make  for 
higher  prices  in  the  case  of  stocks.  The  Dingley  tariff  measure  was  passed  and 
the  crop  situation  was  held  to  be  favorable.  In  the  fall  of  this  year  the  yellow 
fever  "peril”  proved  a hindrance  to  trade.  The  prices  of  stocks  declined  tempor- 
arily at  this  point.  This  year  marks  the  beginning  of  the  third  phase  of  the  min- 
or cycle,  but  it  was  not  until  1898  that  the  rise  becomes  a definitely  marked  move- 
ment. The  upward  movement  in  the  prices  of  stocks  for  this  year  is  irregular,  and 
writers  in  the  financial  journals  report  this  to  be  due  to  the  uneasy  situation 
of  affairs  with  Spain.  In  February  of  this  year  the  Maine  was  sunk.  In  the  fol- 
lowing month  war  with  Spain  was  declared.  This  event  was  reported  as  having 
caused  a very  great  uneasiness  "upon  the  exchange  and  much  liquidation  of  securi- 
ties. With  the  victory  of  American  arms  and  the  signing  of  the  peace  protocols, 
the  tone  of  the  exchange  was  reported  as  improved  and  the  prices  on  the  stock  ex- 

4 

change  rose. 

1900-1904. 

The  period  1899-1900  was  quite  irregular  as  far  as  the  movements  in  the 
general  price  level  of  stocks  were  concerned.  There  was  no  cyclical  movement  and 
there  was  little  in  the  way  of  psychological  factors  that  shed  any  light  upon 
these  irregular  movements.  Furthermore,  the  graph  is  broken  at  this  point  to  se- 
cure the  introduction  of  a new  series  of  indices  of  the  general  price  level  of 
stocks. 

The  period  1S00-1SC4  embraced  a complete  minor  cycle  of  two  phases.  The 
first  phase,  a rising  movement,  began  in  1900.  The  second  phase,  a decline,  began 
in  August,  1902,  and  culminated  in  May,  1904. 

In  the  year  1900,  the  gold  standard  act  became  a law,  but  there  were  many 
disquieting  events  that  prevented  the  rise  from  becoming  a rapid  one  in  that  year. 


. 

_ 

. 

- 


. 


-68- 


With  the  defeat  of  Bryan  in  November,  the  tone  of  the  stock  exchange  appeared  to 
improve.  Daring  the  year  1901  the  monetary  conditions  abroad  were  in  a bad  condi- 
tion. President  McKinley  was  shot  in  September  of  this  year.  In  spite  of  these 
■unfavorable  reports  the  prices  of  railroad  stocks  gained  steadily  and  the  prices 
of  the  other  stocks  held  their  own.  The  year  1902  ushered  in  a series  of  unhappy 
events.  The  crop  reports  were  very  bad  during  this  period  of  time,  because  of  the 
continued  bad  weather.  The  anthracite  coal  strike  was  another  event  that  served 
to  make  the  tone  on  the  stock  exchange  an  uneasy  one.  Toward  the  end  of  the  year 
a distinct  monetary  stringency  developed,  but  the  situation  with  reference  to  the 
crops  improved.  Railroad  stocks  continued  to  rise  during  the  early  part  of  this 
year  and  the  other  stocks  continued  to  hold  their  own.  In  August  the  first  phase 
of  this  minor  cycle  culminated,  and  from  this  month  on  the  second  phase  of  the 
minor  cycle  began.  1903  was  a year  of  rapidly  declining  prices  for  both  railroad 
and  other  securities.  This  year  was  also  a year  of  bad  news  as  far  as  the  point 
of  view  of  large  sized  business  enterprise  was  concerned.  Roosevelt  was  pushing 
his  anti-trust  legislation;  the  northern  securities  decision  was  handed  down; 
there  were  many  labor  troubles;  and  business  appeared  to  be  in  a rather  bad  way 
financially.  The  news  continued  to  be  rather  unfavorable  to  business  during  1904 
and  the  prices  of  stocks  continued  their  decline  until  May,  when  a new  minor  cycle 
began. 

This  decline  that  took  place  in  1903-1904  is  referred  to  as  the  panic 
of  1903-1904. 

1904-1907 

The  period  1904-1907  embraced  a complete  minor  cycle.  The  first  phase, 
a period  of  rising  prices,  began  in  April,  1904,  and  extended  to  January,  1906. 

The  second  phase,  a period  of  declining  prices,  began  in  February,  1906,  and  ex- 
tended to  October,  1907.  The  second  phase  of  this  minor  cycle  was  the  panic  of 


1907 


-89- 


There  were  very  few  events  of  significance  during  the  year  1905,  and  the 
prices  of  both  railroad  and  other  stocks  rose  at  a very  rapid  rate  at  this  time. 
Industry  v;as  reported  as  being  good  and  trade  as  active.  The  absence  of  unfavor- 
able news  may  be  h9ld  as  one  of  the  factors  making  for  the  rapid  rise  in  the  pri- 
ces of  securities  during  this  period.  1906  was  a year  of  very  irregular  stock 
prices,  and  the  beginnings  of  the  decline  can  be  clearly  seen  at  this  time.  In 
January  of  this  year,  Jacob  Schiff  warned  of  the  impending  panic.  There  were  dif- 
ficulties with  labor  in  the  coal  mines,  and  Roosevelt  spoke  against  the  acquisi- 
tion of  large  fortunes.  Towards  the  end  of  this  year  the  news  items  spoke  of  a 
monetary  stringency,  and  the  general  trend  of  affairs  seemed  to  denote  that  a 
halt  had  come  over  the  very  rapid  rise  in  the  prices  of  securities  that  preceded 
this  period.  The  signs  of  the  impending  panic  appeared  to  be  in  the  air.  The 
panic  on  the  stock  exchange  began  in  January  1907.  It  began  with  a great  strin- 
gency in  the  monetary  markets,  and  with  a great  deal  of  borrowing  by  corporations 
on  short  time  notes.  The  news  items  reported  the  panic  as  beginning  in  March, 
1907,  but  a glance  at  the  indices  of  the  prices  of  stocks  will  serve  to  show  that 
the  decline  in  values  had  begun  in  January,  and  that  this  decline  was  already  well 
under  way  in  March.  The  Financial  Review  reports  that  this  panic  was  caused  by 
the  "impairment  of  confidence  in  the  railroads  following  a declaration  of  the  un- 
favorable attitude  of  the  government".  There  seems  to  be  absolutely  no  evidence 
to  3how  that  this  single  event  was  the  cause  of  the  severe  decline  in  the  prices 
of  stocks  that  characterized  the  panic  of  1907.  During  the  rest  of  this  year, 
Roosevelt  continued  to  make  speeches  that  were  regarded  as  unfavorable  to  large 
business  enterprises.  Newspapers  reported  that  bond  syndicates  were  having  a 
great  deal  of  difficulty  in  disposing  of  their  purchases  of  bonds.  In  October  of 
this  year,  the  period  of  falling  prices  came  to  an  end. 

1908-1910 

This  period  embraced  a complete  minor  cycle  of  two  phases.  The  first 


- 


‘ 


I • 


. 


♦ 


. 


. 


-90- 


phase,  a rise,  began  in  1908  and  culminated  in  1909  for  both  railroad  and  other 
securities.  The  second  phase,  a decline,  ended  in  July,  1910. 

1908  was  a year  of  unfavorable  events  from  the  point  of  view  of  the 
stock  exchange,  but  in  spite  of  these  things  the  rise  in  the  prices  of  stocks  was 
quite  marked  and  very  rapid.  The  year  1908  marks  the  recovery  from  the  panic  of 
1907,  and  this  recovery  was  apparently  not  halted  by  the  presidential  election  of 
the  year,  nor  by  any  of  the  events  that  were  termed  unfavorable  by  financial 
writers.  From  the  point  of  view  of  stock  exchange  traders  the  news  for  the  year 
1909  was  rather  negative  in  character.  The  prosecution  of  trusts  continued  dur- 
ing this  year.  Mr.  Harriman  died  after  a month’s  illness.  In  1910  it  appeared 
that  Taft  was  going  to  continue  Roosevelt's  policies  with  reference  to  the  trusts. 
The  tone  of  the  stock  exchange  was  described  at  this  time  as  "decidedly  gloomy". 
There  were  many  strikes  in  progress  during  this  year.  Towards  the  end  of  the 
year,  the  business  outlook  appeared  to  be  brighter;  this  was  held  to  be  due  to 
the  Democratic  victory  in  the  congressional  elections. 

1911-1914 

This  period  embraced  a complete  minor  cycle  of  two  phases.  The  first 
phase  of  this  minor  cycle  began  in  September,  1911,  and  ended  in  September,  1912. 
This  was  a period  of  rising  stock  prices.  The  second  phase  began  where  the  first 
phase  ended)  and  extended  to  the  close  of  the  stock  exchange  in  August,  1914. 

This  was  a period  of  very  gradual  decline  in  the  general  level  of  the  prices  of 
bothiailroad  other  stocks. 

The  year  1911  was  also  a year  of  rather  unfavorable  news  to  business 
enterprisers  of  large  affairs.  Trade  was  reported  as  slackening;  the  Interstate 
Commerce  Coranission  refused  to  sanction  higher  rates  in  a number  of  railroad  de- 
cisions; there  were  rumors  of  an  impending  war  between  England  and  Germany;  and, 
finally,  there  were  some  unfavorable  judicial  decisions  awarded  on  the  government 


- 

* 

' 

. 

* 


* 


-91- 


anti*trust  suits  together  with  the  promise  of  more  prosecution.  The  prices  of 
stocks  declined  steadily  until  September,  1911. 

The  year  1912  appeared  to  he  a year  of  more  favorable  events  as  far  as 
the  traders  on  the  stock  exchange  were  concerned.  The  crop  outlook  was  reported 
as  improved  and  business  was  active.  There  were  some  events  that  were  not  so 
favorably  received,  however.  .Among  these  can  be  noted  labor  troubles  in  many  in- 
dustries; the  Titanic  disaster;  the  formation  of  the  Progressive  Party;  and  much 
foreign  selling  on  the  stock  exchange.  The  prices  of  stocks  rose  steadily  during 
this  year  up  to  the  month  of  September. 

The  gradual  decline  in  the  prices  of  stocks  began  at  this  point  and 
persisted  until  the  stock  exchange  was  closed  in  1914.  In  1913  VJoodrow  Wilson 
was  inaugurated  President.  His  speeches  appeared  as  disturbing,  since  he  came 
out  quite  clearly  for  public  policy.  The  income  tax  lav/  was  passed  during  this 
year.  It  was  clear  in  1913  that  war  was  impending  in  Europe.  The  Federal  Re- 
serve act  was  passed  in  this  year.  The  Balkan  situation  was  regarded  as  alarming 
In  1914  financial  writers  described  Wilson's  attitude  as  more  favorable  to  trusts 
than  his  two  predecessors  had  been.  In  this  year  the  Federal  Reserve  System  ap- 
peared clearly  as  having  the  approval  of  the  banks,  if  the  large  number  of  banks 
securing  membership  can  be  used  as  an  index.  Daring  this  year  the  Claflin  fail- 
ure occurred,  and  foreign  trade  ms  regarded  as  unsatisfactory.  In  July,  1914, 
the  great  European  war  began,  and  the  heavy  liquidation  of  securities  proved  the 
occasion  for  the  closing  of  the  exchange. 

1915-1917 

This  period  embraced  a complete  minor  cycle.  The  first  phase  of  this 
cycle  was  a period  of  rising  stock  prices  that  began  in  1915  and  culminated  in 
September,  1916.  The  ensuing  decline,  the  second  phase,  ended  December,  1917. 

During  this  period  the  European  war  was  being  waged  and  conditions  were 
unusual  on  this  account.  During  the  year  1915,  the  Germans  were  successful  on 


-93- 


to  discount  this  effect  into  a present  worth  for  prices  of  securities.  Some  of 
these  psychological  factors  appear  to  thus  affect  the  prices  of  particular  stocks, 
or  particular  groups  of  stocks,  and  some  affect  stocks  generally  considered.  Those 
that  affect  the  prices  of  stocks  generally  considered  will  have  the  greatest  ef- 
fect upon  the  general  price  level  of  stocks.  These  psychological  factors  affect 
the  prices  of  stocks  very  directly,  when  they  affect  these  prices  at  all.  They 
aid  stock  traders  in  forming  a judgment  as  to  the  values  of  securities  in  advance. 
In  this  way  the  prices  of  stocks  came  to  be  an  anticipatory  index  of  the  condition 
of  business  enterprise.  The  effect  of  these  events  is  very  often  recorded  at  a 
later  date  in  other  indices  of  the  condition  of  business  enterprise  and  the  con- 
dition of  credit.  This  w ill  account  for  the  lag  that  these  indices  show  when  com- 
pared to  the  indices  of  the  general  price  level  of  stocks. 

An  untoward  event  will  not  cause  a perceptible  change  in  the  general 
price  level  of  stocks  unless  it  affects  the  conditions  that  are  fundamental  to 
these  prices.  The  mere  fact  of  the  death  of  an  important  man  will  have  little  or 
no  effect  at  all,  unless  it  is  quite  clear  that  his  death  will  affect  the  earning 
ability  of  business  enterprise.  This  fact  is  shown  in  the  discussion  in  the  first 
parts  of  this  chapter.  Likewise,  a favorable  event  will  not  cause  any  percepti- 
ble change  in  the  general  price  level  of  stocks  unless  it  affects  the  conditions 
fundamental  to  these  prices. 

If  the  position  of  business  enterprise  is  already  weak,  the  announcement 
of  some  'unfavorable  judicial  decision,  or  some  other  item  of  news  not  considered 
very  favorable  to  business  enterprise,  will  serve  to  precipitate  a decline  in 
price.  On  the  other  hand,  if  the  position  of  business  enterprise  is  manifestly 
very  sound,  a favorable  bit  of  news  may  serve  to  cause  a very  pronounced  rise  in 
prices  of  stocks. 

The  cyclical  movements  that  the  general  price  level  of  stocks  makes  are 
very  closely  related  to  the  quality  of  the  psychological  factors.  A close  exani- 


-94- 


nation  of  the  news  items  in  relation  to  the  cyclical  movements,  which  will  be 
found  in  the  earlier  paragraphs  of  this  chapter,  shows  that  the  quality  of  these 
psychological  factors  appear  to  move  in  much  the  same  manner  that  the  cycles,  es- 
pecially the  minor  cycles,  do  themselves.  During  the  various  phases  of  the  cycles 
the  quality  of  the  news  is  such  as  to  be  in  close  harmony  with  the  condition  of 
business  enterprise.  That  is  to  say,  during  the  phase  of  a minor  cycle,  where 
prices  are  on  the  decline,  then  the  news  items  are  of  such  a nature  that  would 
tend  to  promote  such  a condition  - in  a word  they  are  unfavorable  to  business  en- 
terprise. During  the  phase  where  prices  are  rising,  then  the  news  items  are  of 
such  a condition  as  to  tend  to  promote  a rising  value  for  stock  - they  are  favor- 
able to  business  enterprise.  Thus  it  is  that  the  psychological  factors  move  in 
cycles  in  much  the  same  manner  that  the  prices  of  the  stocks  themselves  do.  It  is 
not  possible  to  plot  these  items  of  news  upon  a chart,  as  the  various  indices 
herein  considered  have  been  plotted,  but  a comparison  of  prices  of  stocks  with 
news  items,  over  a long  period  of  time,  reveals  that  the  quality  of  these  news 
items,  with  reference  to  business  enterprise,  varies  directly  with  the  condition 
of  business  enterprise,  and  consequently  with  the  general  price  level  of  stocks. 

No  perceptible  lag  can  be  noted  between  the  psycho logical  factors  and  the  general 
price  level  of  stocks.  Such  a computation  would  be  very  difficult  to  make,  be- 
cause of  the  nature  of  these  psychological  factors. 

It  is  believed  that  these  psychological  factors  are  one  of  the  steps  in 
the  causal  sequence  underlying  the  general  price  level  of  stocks.  It  is  clear 
from  what  has  already  been  analyzed  that  there  is  an  important  relation  between 
the  movements  of  the  general  price  level  of  stocks  and  the  quality  of  the  psycho- 
logical factors.  These  items  of  news  affect  the  prices  of  stocks  in  a very  di- 
rect way.  They  are  very  quickly  communicated  to  the  traders  on  the  stock  exchange 
and  they  form  a part  of  the  judgments  that  these  traders  make  in  estimating  the 
values  of  securities,  and  consequently  the  prices  they  are  willing  to  pay  for 


- 


- ' 


■ 

* 

* 

* 


v;:  • r 1 • i 
i r - 


. 


-95- 


them.  It  cannot  be  affirmed  that  these  factors  are  the  final  cause,  for  we  have 
to  go  but  one  step  further,  and  a3k  for  the  causes  for  these  factors.  But  they 
are  most  certainly  a part,  and  a very  real  and  definite  part,  of  the  nexus  under- 
lying the  prices  of  stocks. 

This  cyclical  movement  that  we  have  just  observed  the  psychological  fac- 
tors to  make  is  at  the  very  basis  of  our  lives.  A close  examination  reveals  that 
it  is  the  tendency  for  people  to  act  in  this  way.  The  intellectual,  emotional, 

and  perhaps  even  the  physical  phases  of  life  itself  are  cyclical.  Pessimism  fol- 

ouuX 

lows  optimism;  health  often  follows  periods  of  illness;  love,  fear,  anger,  hate 

A 

pass  into  one  another;  we  learn  and  forget;  accomplish  and  then  often  do  nothing 
for  periods.  In  face  of  these  facts  it  is  quite  natural,  and  to  be  expected,  that 
the  elements  that  compose  these  psychological  factors  should  move  in  cycles.  TTJhen 
we  have  answered  the  question  of  whyjwe  will  have  answered  the  very  question  of 
life  itself. 

Conclus ions : - 

1.  That  the  psychological  factors  have  load  a very  important  effect  upon 
the  general  price  level  of  stocks. 

2.  That  in  order  that  these  psychological  factors  affect  the  general 
price  level  of  stocks  it  is  necessary  that  they  affect  the  conditions  which  are 
fundamental  to  this  general  price  level,  that  is,  the  condition  of  business  enter- 
prise. 

3.  That  it  is  through  these  factors  that  traders  on  the  stock  exchange 
are  able  to  form  judgments  as  the  value  of  stocks,  expressed  in  terms  of  price; 
and  that  it  is  through  this  fact  that  these  traders  are  able  to  anticipate  the  ac- 
tual working  out  of  conditions  that  these  psychological  factors  indicate  will  take 
place  in  the  immediate  future.  In  this  way  the  general  price  level  of  stocks 
comes  to  be  an  anticipatory  index  of  the  condition  of  business  enterprise,  and 


" 


. 


•• 

- 

* • 


-96- 


the  other  indices  show  a perceptible  lag  when  compared  with  it. 

4.  That  as  the  position  of  business  enterprise  is  weak  or  strong,  the 
effect  of  these  psychological  factors  will  be  great  or  little;  and  that  these 
factors  are  often  able  to  "set  off"  a general  rise  or  a decline  in  the  prices  of 
stocks  provided  the  technical  position  of  the  market  is  of  a like  nature  to  these 
factors. 

5.  That  the  psychological  factors  move  in  cycles  in  a way  that  is  quite 
similar  to  those  in  which  the  general  price  level  of  stocks  moves;  and  that  this 
cyclical  movement  is  characteristic  of  the  psychological  factors  in  just  the  same 
way  that  it  is  characteristic  of  economic  factors;  and  of  the  very  facts  at  the 
basis  of  life. 


« • > r 


■ 

■*  ' t?  * % " ' - %J9mm 

' _ * \J  . m 


■ ;•  . .j  f £\  • 


♦ 


* - 

1 


* 


‘ 

r -*■  .»  * . •• 


-97- 

CHAPTER  XI.  CONCLUSION 

The  conclusions  of  the  individual  chapters  of  this  investigation  have 
been  stated  at  the  end  of  each  chapter.  It  now  remains  to  combine  these  separate 
and  individual  conclusions  into  a series  of  general  conclusions,  and  into  a the- 
sis which  shall  embody  the  results  of  this  investigation. 

It  was  stated  in  the  introduction  that  the  object  of  this  study  was 
twofold.  In  the  first  place,  it  was  desired  to  unravel  as  much  as  possible  of 
the  causal  nexus  underlying  the  fluctuations  of  the  prices  of  stocks;  to  find  out 
to  what  extent  the  prices  of  stocks  are  governed  and  controlled  by  economic  fac- 
tors and  conditions;  to  determine  the  sequence  for  these  fluctuations;  and  to  es- 
timate the  possibility  of  formulating  a law  or  series  of  laws  which  will  account 
for  the  movements  that  the  general  price  level  of  stocks  make.  In  the  second 
place,  it  was  desired  to  examine  the  general  price  level  of  stocks  and  to  see  to 
what  extent  it  is  representative  of  the  condition  of  business  enterprise;  to  see 
if  an  index  number  of  the  prices  of  stocks  fluctuates  with  the  changes  in  the 
condition  of  business  enterprise;  and  to  see  if  the  general  price  level  of  stocks 
is  a satisfactory  barometer  for  use  in  determining  business  policy.  In  this  con- 
clusion, these  objects  will  be  taken  up  in  order. 

The  Causal  Nexus  Under lying  the  General  Price  Level  of  Stocks:- 

It  is  quite  evident  from  the  discussion  contained  in  the  previous  chap- 
ters that  a complete  solution  of  the  problem  of  causality  for  the  price  changes 
in  stocks  is  impossible.  This  Gordian  Ehot  cannot  be  untangled  with  the  science 
of  economics  and  statistics  in  their  present  condition.  It  is  realized  that  a 
complete  explanation  of  the  causality  of  the  simplest  facts  of  science  is  impos- 
sible, but  science,  by  means  of  certain  fundamental  assumptions,  has  been  able 
to  explain  many  things  in  terms  of  causality.  It  is  impossible  to  give  any  such 
complete  explanation  of  the  movements  made  by  the  general  price  level  of  stocks 


_ 


- 

* l 


. Ct' 

1 


* 


• - etwIAU  ■ £ 


■ 

■ 

. 


- 


. 


-98- 

in  these  terms.  It  is  realized  that  the  category  of  cause  and  effect  is  merely 
a category  of  the  mind  and  that  it  is  not  necessarily  connected  with  the  essence 
of  phenomena*.  It  is,  nevertheless,  a very  convenient  method  of  explanation, 
provided  its  limitations  are  kept  in  mind. 

While  it  is  realized  that  no  complete  explanation  can  he  made  for  the 
movements  of  the  general  price  level  of  stocks,  a great  many  important  facts  can 
he  explained  and  the  causal  sequence,  within  certain  limits,  can  he  workBd  out 
in  a satisfactory  manner. 

The  marked  upward  secular  trend  of  the  general  price  level  of  stocks 
finds  its  counterpart  in  practically  all  the  other  indices.  This  shows  that  this 
movement  has  been  a characteristic  one  for  business  enterprise  for  the  period 
1890-1918.  In  the  case  of  the  indices  of  the  general  price  level  of  stocks  the 
analysis  which  has  been  made  in  the  preceding  chapters  points  to  the  fact  that 
this  movement  has  been  the  product  of  an  increasing  amount  of  money  and  credit 
and  also  an  improvement  in  the  condition  of  business  enterprise.  The  increasing 
amount  of  money  and  credit  is  clearly  shown  by  the  monetary  and  banking  indices, 
and  the  sequence  of  this  pbsnomenon  is  traced  in  chapter  IV,  which  deals  with 
these  indices.  The  improvement  in  the  condition  of  business  enterprise  is  shown 
by  the  indices  of  earnings  and  dividends  and  also  by  the  index  of  the  number  of 
business  failures.  The  increasing  rate  of  earnings  for  corporations  is  shown  on 
the  chart  upon  which  these  indices  have  been  plotted,  and  an  explanation  of  the 
sequence  of  the  effect  of  these  earnings  and  dividends  upon  the  general  price 
level  of  stocks  is  given  in  chapter  III.  The  index  of  the  number  of  business 
failures  has  a very  much  smaller  secular  trend  than  those  indices  showing  the 
increasing  number  of  corporations  (listings  of  bonds  and  stocks,  new  incorpora- 
tions, new  building).  This  will  serve  to  bear  out  the  contention  that  business 

* Cf . Hume , David , A Treatise  on  Human  Nature. 


. 

. , 


• • 

* 


■ 

* 

. 

' . 4‘ 

. 

. 

, 


-99- 

enterprise  improved  in  its  condition  during  the  period  considered,  "because  the 
number  of  failures  did  not  keep  pace  with  the  number  of  new  business  units  orga- 
nized. These  indices  will  be  found  on  the  chart  for  the  business  enterprise 
group,  parts  I and  II,  and  an  analysis  of  the  sequence  of  the  relation  between 
these  groups  of  indices  will  be  found  in  chapter  V.  It  may  be  thought  that  the 
rising  secular  trend  in  the  case  of  the  general  price  level  of  stocks  was  caused 
by  a declining  rate  of  interest,  while  the  dividends  either  increased,  remained 
the  same,  or  decreased  at  a lower  rate  than  the  rate  of  interest.  An  examination 
of  the  indices  of  the  rates  of  interest,  which  will  be  found  on  the  chart  showing 
the  monetary  and  banking  group  reveals  the  fact  that  there  has  been  no  such  de- 
cline for  the  period  considered. 

The  major  cycle  for  the  indices  of  the  prices  of  stocks  finds  its  coun- 
terpart in  many  of  the  other  indices  discussed  in  this  investigation.  This 
shows  that  this  movement  is  a characteristic  one  for  business  enterprise.  This 
movement  is  not  nearly  so  clear  as  some  of  the  other  movements  the  various  indi- 
ces are  observed  to  make,  and  the  movement  is  very  gradual.  This  movement  is  not 
a wide  one,  and  the  temporal  axis  is  large  relative  to  the  quantitative  axis. 

For  these  reasons  this  major  cycle  is  not  of  as  great  importance  as  the  minor 
cycle. 

The  immediate  causes  or  occasions  for  this  movement  are  found  in  those 
conditions  that  govern  business  enterprise  and  credit.  These  movements  are  cy- 
clical because  business  enterprise,  of  which  these  stocks  and  shares  are  repre- 
sentative, fluctuates  in  similar  cycles.  In  this  movement,  credit  and  money 
play  an  important  part.  An  increasing  amount  of  money  very  generally  means  in- 
creasing bank  reserves.  This  will  be  followed  by  an  increasing  amount  of  loans 
and  deposits,  because  the  interest  rates  will  fall  as  the  bank  reserves  increase. 
But  this  extension  cf  credit  cannot  continue  forever.  Soon  the  banks  approach 
the  period  when  they  get  "loaned  up".  Then  the  interest  rate  rises,  and  the 


' . 


* 


* 


v ; , ; 

' 


* 


. ...  ;•£  . r 


- 


. 


, 


. 

. 


. ■ . 


-100- 

contraction  of  credit  begins.  The  interest  rate  does  not  move  in  cycles  as  do 
the  other  indices  of  credit.  The  reason  for  this  was  given  in  chapter  IV.  But 
nevertheless  control  of  credit  is  exercised  through  the  interest  rate*.  This 
explanation  will  account  for  these  movements,  to  a certain  extent,  but  it  is 
clearly  not  the  entire  story,  although  it  is  an  important  part.  Many  other  indi-j 
ces,  which  are  not  affected  by  the  credit  situation  outlined,  show  this  major 
cycle.  The  movement  is  a characteristic  one  and  involves  the  very  fundamentals 
of  business  enterprise,  which  have  not  yet  been  satisfactorily  explained.  For 
this  reason,  these  movements  in  the  case  of  the  indices  of  the  prices  of  stocks 
cannot  be  explained  entirely,  although  the  influence  of  credit  and  the  control 
exercised  by  the  rate  of  interest  are  believed  to  have  an  important  part  in  this 
movement. 

The  minor  cycle,  in  many  respects,  may  be  said  to  be  the  most  important 
movement  that  the  general  price  level  of  stocks  makes.  This  movement  is  a char- 
acteristic one,  and  practically  all  of  the  indices  show  the  movement  quite  clear- 
ly. The  importance  of  this  movement  lies  in  the  fact  that  it  is  very  sharply  de- 
fined and  that  both  phases,  the  increasing  phase  and  the  decreasing  phase,  are 
quite  rapid.  That  is, the  quantitative  axis  is  large  as  compared  to  the  temporal 
axis.  The  minor  cycle  shows  a great  contrast  with  the  major  cycle  in  its  rapid- 
ity of  movement  and  in  its  effect  upon  business  enterprise. 

The  causes  for  the  minor  cycle  are  quite  as  obscure  as  are  those  for 
the  major  cycle.  It  is  not  possible  to  give  an  adequate  explanation  for  either 
phenomena.  The  influence  of  money  and  credit  in  the  case  of  the  minor  cycle  is 
of  a similar  nature  to  the  same  forces  in  the  case  of  the  major  cycles,  and  the 
sequence  follows  along  the  same  lines.  Inasmuch  as  this  sequence  has  been  given 
already  in  chapter  IV,  it  need  not  be  repeated  here. 

*Cf.  Fisher,  Irving,  The  Purchasing  Power  of  Money,  chapters  IV  and  XI.  These 
movements  are  explained  by  Fisher  to  be  due  to  the  "lagging  adjustment  of  inter- 
est". 


- 

- 

- 


- 


«■ ' 


. 


- 

, 


. 

* 


. 


. 


- 

. 


* 

. 


The  seasonal  cycles  are  movements  of  a very  short  duration  and  they 
are  always  embraced  within  a year.  The  decline  in  prices,  in  the  case  of  the 
general  price  level  of  stocks,  takes  place  during  the  fall  of  the  year,  and  the 
prices  during  the  following  winter  and  spring.  The  declining  phase  of  this  cy-  J 
cle  is  quite  rapid,  but  the  rising  phase  is  not  so  rapid.  Although  this  cycle 
is  very  pronounced  and  clearly  rnarkBd  it  is  not  of  as  great  importance  as  the 
minor  cycle.  This  is  believed  to  be  due  to  the  fact  that  business  units  and 
credit  institutions  have  learned  to  adjust  their  business  to  this  movement.  It 
is  of  so  regular  occurence,  and  has  persisted  for  so  long  a time,  that  it  has 
come  to  be  regarded  as  one  of  the  "standard”  situations  of  the  business  year. 

Were  it  not  for  this  fact  the  several  indices  would  show  the  seasonal  cycle  as  a 

I 

much  more  pronounced  movement,  and  a much  more  important  consequence  for  busi- 
ness enterprise. 

The  explanation  for  this  seasonal  cycle  is  not  a hard  one  to  make.  In 
the  first  place  there  is  a heavy  withdrawal  of  funds  from  the  banks,  especially 
from  the  banks  in  the  manufacturing  centers.  This  produces  a decline  in  the  a- 
mount  of  credit  outstanding  and  lowers  the  profit  making  possibilities  of  busi- 
ness enterprise.  It  also  forces  many  holders  of  stocks  to  sell  their  shares,  for 
they  cannot  get  sufficient  funds  to  hold  them  for  the  "market".  During  the  fall 
of  the  year,  also,  the  prices  of  raw  commodities  are  seen  to  rise  at  a faster 
rate  than  are  the  prices  of  manufactured  commodities.  This  lowers  the  profits 
of  business  enterprise.  It  is,  fundamentally,  the  alterations  in  credit  and 
business  conditions,  produced  by  the  methods  of  harvesting,  moving,  shipping, 
and  financing  the  crops  that  is  at  the  basis  of  the  seasonal  cycle.  The  sequence 
for  this  movement  is  traced  out  in  chapters  IV  and  VII,  and  need  not  be  repeated 
here. 

The  month  to  month  variations  in  the  prices  of  stocks  are  not  of  a 


.• 

* 

. 

* 

* 


« 

. 

. 

. 

. 

. 


-102- 


great  significance.  The  fact  that  these  movements  do  not  find  a counterpart  in 
the  indices  of  other  business  conditions,  shows  that  they  are  of  small  importance 
for  business  enterprise,  and  that  they  are  peculiar  to  the  movements  of  the  gener- 
al price  level  of  stocks.  No  explanation  is  offered  for  these  movements,  because 
of  the  fact  that  it  was  impossible  to  make  a correlation  and  comparison  of  this 
movement  in  the  case  of  the  price  level  of  stocks  with  any  of  the  movements  in 
the  case  of  the  other  indices. 

The  General  Price  Level  of  Stocks  as  an  Index  of  Business  Conditions 

The  close  correlation  that  the  graph  of  the  indices  of  the  prices  of 
stocks  make  with  the  graphs  of  the  other  indices,  shows  that  the  general  price 
level  of  stocks  is  a very  good  index  of  fundamental  business  conditions.  The  con- 
clusions appended  to  the  various  chapters  show  that  the  general  price  level  of 
stocks  registers  changes  in  business  enterprise,  usually  at  some  time  in  advance. 
This  period,  by  which  the  indices  of  the  general  price  level  of  stocks  leads  the 
other  indices,  varies  from  three  to  nine  months,  depending  upon  the  nature  of  the 
various  indices  compared  with  the  general  price  level  of  stocks. 

The  lag  that  the  other  indices  show  with  reference  to  the  general  price 
level  of  stocks  is  due  to  the  fact  that  the  traders  in  stocks  sire  able  to  discount 
the  psychological  factors;  the  news  items,  rumors,  legislative  enactments,  etc., 
into  a present  worth.  Traders  in  stocks  endeavor  to  keep  abreast  of  the  times  ancft 
of  the  various  movements  and  currents  that  they  believe  will  affect  business  en- 
terprise and  hence  the  value  of  the  stocks  with  which  they  trade.  They  obtain 
this  information  from  the  various  newspapers,  journals,  gossip  of  the  street,  and 
investment  information  services.  This  process  of  discounting  the  psychological 
factors  which  will  affect  the  condition  of  business  enterprise  sometime  in  the  fu- 
ture into  a present  net  worth  is  described  in  chapter  X. 

Thus  the  general  price  level  of  stocks  is  a very  satisfactory  anticipa- 
tory index  or  barometer  of  the  condition  of  business  enterprise.  The  movements 


- 


, Eftl 


: « r ' ; : 

- 

: . • f£ 


- 


\,  r civ  .-r  . i 


:*  V , . i . . •:  *.  , 

* 


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i r 

. 


. 


. 

jt %im 


. 


. 


-103- 


that  the  indices  of  the  general  price  level  of  stocks  make  indicate  the  movements 
that  business  enterprise  will  make  at  some  time  in  the  future.  The  general  price 
level  of  stocks,  for  this  reason,  is  perhaps  the  best  general  barometer  to  use  in 
connection  with  the  adjustment  of  the  individual  business  unit  to  changing  condi- 
tions. It  is  not  believed  that  any  one  index  is  entirely  satisfactory  for  this 
purpose,  but  if  only  one  general  index  can  be  kept,  the  general  price  level  of 
stocks  is  by  all  odds  the  most  satisfactory,  because  of  the  fact  that  it  is  able 
to  anticipate  the  actual  working  out  of  the  conditions  to  a greater  extent  than 
any  of  the  other  indices  studied  in  this  investigation. 

While  it  is  greatly  to  be  regretted  that  it  was  not  possible  to  explain 
more  of  the  movements  that  the  various  indices  of  business  enterprise  are  ob- 
served to  make,  the  value  of  the  study  of  these  several  indices  is  not  entirely 
destroyed.  For  the  individual  business  unit,  the  problem  is  not  so  much  why  the 
various  cycles  and  other  movements  are  made,  as  it  is  what  these  movements  are, 
and  how  the  individual  business  unit  can  be  adjusted  to  these  movements.  These 
movements,  especially  the  minor  cyclical  movement,  have  very  important  effects 
upon  the  individual  business  unit.  The  problem  for  the  business  enterpriser  or 
business  manager  is  twofold:  what  are  the  movements;  and  how  can  I best  adjust 

my  business  to  these  movements?  The  only  way  that  an  answer  can  be  made  is 
through  study  of  the  movements  as  shown  by  large  graphs  of  the  several  indices. 

No  single  index  is  enough;  it  is  necessary  to  keep  many  indices  showing  different 
things  to  some  extent  depending  upon  the  nature  of  the  business.  An  index  of  the 
general  price  level  of  stocks  should  by  all  means  be  kept.  These  indices  ought 
to  be  plotted  to  a large  scale  in  order  that  the  movements  be  clearly  distin- 
guished. If  this  is  done  it  can  easily  be  seen  what  movements  are  in  progress; 
what  movements  have  been  recently  in  progress;  and  what  is  indicated  for  the  fu- 
ture by  the  trend  of  the  present  movements. 


* 

al  31 


* 

v . ad)  ‘ ..  . • 

, 

* 


- 

: 


» 

. 


-104- 

The  net  effect  of  study  of  this  sort  and  ^adjustment  of  the  individual 
business  units  to  these  movements  will  be  towards  a gradual  slackening  in  these 
movements;  they  will  become  shorter  of  duration  and  of  less  intensity.  In  this 
way  the  business  panic  or  crisis  can  gradually  be  reduced  in  its  severity  and  the 
elements  of  risk  and  speculation  reduced  to  a minimum.  It  will  tend  to  stabilize 
industry  and  business  enterprise,  and  make  for  an  increasing  and  less  inter- 
rupted production. 

The  cyclical  movement  is  fundamental  to  the  facts  of  life  itself.  What 
is  needed  in  all  spheres  of  activity  is  not  an  explanation  - science  has  well- 
nigh  abandoned  the  attempt  at  cause  and  effect  - but  an  answer  to  the  questions 
of  what  they  are,  and  how  can  I use  them  for  improvement.  The  problem  for  busi- 
ness enterprise  differs  in  no  ways,  at  basis,  from  the  fundamental  problems  of 
life  itself. 


. 


* 


. 


-10§- 


APFENPIX  A.  NATURE  AND  SOURCE  OF  TEE  DATA:  PBEPAR- 
AT ION  OF  THE  GRAPHS. 

At  the  end  of  this  investigation  there  will  be  found  a series  of  graphs 
which  were  used  in  the  analysis  of  the  general  level  of  stock  prices.  In  order 
to  the  various  chapters  clear,  it  will  be  necessary  to  consider  the  nature 

of  the  data  used  in  the  preparation  of  the  graphs,  the  sources  from  which  the  dar- 
ta  was  obtained,  and  finally,  just  what  method  was  employed  in  plotting  the  data. 
As  has  been  stated  before,  the  indices  of  the  prices  of  stocks  were  plotted  on  a 
chart  and  the  other  economic  indices  were  placed  into  groups  and  then  plotted  on 
graphs. 

Since  the  analysis  is  made  by  considering  the  effect  of  one  group  of 
indices  at  a time  for  the  entire  period  under  consideration,  this  division  will 
be  followed  in  explaining  the  steps  taken  in  the  preparation  of  the  graphs,  and 
the  gathering  of  the  data.  We  will  begin  by  examining  the  "Index  Number  of  Stock 
Prices”. 

The  Index  Number  of  Stock  Prices: 

The  method  chosen  of  representing  the  general  level  of  price  of  stocks 
was  that  of  selecting  a number  of  stocks  and  making  an  index  number  of  the  aver- 
age monthly  prices  of  them.  This  index  number  was  then  plotted  on  a chart.  The 
movements  of  this  line  indicate  the  movements  of  the  general  level  of  the  prices 
of  stocks  for  the  period  considered.  The  index  number  was  divided  into  two  parts: 
an  index  number  of  railroad  stocks,  and  an  index  number  of  other  stocks.  The 
railroad  stocks  index  number  and  the  other  stocks  index  numbers  were  plotted  sep- 
arately. 

There  will  be  found  to  be  two  breaks  in  these  lines;  the  first  break  oc- 
curs in  December,  1899,  the  lines  beginning  again  at  a new  and  lower  level  in 


-106- 


January , 1900.  The  second  break  occurs  In  July,  1914,  and  begins  anew  in  December 
of  the  same  year. 

The  first  break  was  occasioned  by  the  fact  that  a different  index  number 
was  used  for  the  period  1890  to  1900,  from  the  period  following  1900.  It  was  not 
possible  to  obtain  a thoroughly  representative  list  of  stocks  for  the  entire  peri- 
od, and  consequently  it  was  found  advisable  to  break  the  line  at  this  point.  The 

period  1890  to  1900  will  be  remembered  as  a period  of  integration  among  both  rail- 

(U 

road  and  industrial  corporations,  and  also^a  period  during  which  many  new  indus- 
trial enterprises  were  incorporated.  A choice  of  two  alternatives  was  left;  alter 
the  list  of  stocks  included  in  the  index  number  to  keep  pace  with  the  changes  in 
corporate  enterprise,  or  else  a separate  index  number  had  to  be  made  for  the  peri- 
od 1890  to  1900  and  another  one  for  the  following  period.  The  latter  alternative 
was  chosen  for  the  reason  that  a homogeneous  series  was  thought  preferable  to  a 
series,  the  components  of  which,  changed  from  time  to  time.  As  new  stocks  are 
added  and  old  ones  dropped  from  a series  the  index  number  and  the  graph  will  show 
movements  which  are  not  truly  representative  of  the  movements  of  the  general  level 
of  stock  prices.  If  a stock  should  be  added  or  dropped,  the  price  of  which  is 
different  by* a large  margin  from  the  general  average,  the  index  number  would  then 
be  seriously  affected  and  its  utility  for  the  purpose  in  hand  would  be  seriously 
impaired. 

The  second  break  was  occasioned  by  the  closing  of  the  New  York  Stock 
Exchange  in  August  1914,  following  tbs  severe  decline  in  prices  over  the  news  of 
the  European  war.  The  Stock  Exchange  re-opened  in  December,  1914,  with  the  prices 
of  stocks  at  a new  level,  and  so  the  index  number  was  begun  anew  at  this  time  and 
continued  unbroken  to  the  end  of  the  period. 

The  stock*  included  in  the  railroad  group  from  1890  to  1900,  were  twenty 
in  number  as  follows: 




- 


. 

. 


• 

'•  - , 

. ‘ 


„ 


. 

. 


„ V 


* 


: - I 


-107- 

— — — — ] 

Atchison,  Topeka,  and  Santa  Pb 

Railroad,  Common 

Stock 

Chicago , Burlington  and  Quincy 

n tt 

n 

Chicago,  Milwaukee,  and  St.  Paul 

If  11 

11 

Chicago  and  Northwestern 

11  ft 

11 

Chicago,  Rhode  Island,  and  Pacific 

tt  n 

If 

Cleveland,  Cincinnati,  Chicago,  and  St.  Louie 

« n 

it 

Denver  and  Rio  Grande 

n ti 

11 

Illinois  Central 

n n 

ft 

Lake  Shore  and  Michigan  Southern 

tt  it 

tt 

Chicago  and  Alton 

n ti 

ft 

Louisville  and  Nashville 

it  « 

If 

Michigan  Central 

it  tt 

ti 

Missouri  Pacific 

tt  tt 

ft 

New  Central  and  Hudson  River 

tt  tt 

it 

New  York,  New  Haven,  and  Hartford 

tt  it 

it 

Norfolk  and  Western 

tt  « 

tt 

Northern  Pacific 

tt  tt 

tt 

Southern  Pacific 

it  n 

tt 

Union  Pacific 

ii  tt 

tt 

Wahash 

it  « 

tt 

The  stocks  included  in  the  other 

stocks 

group 

from  1890  to  1900 

are 

eight  in  number  as  follows: 

American  Cottonseed  Oil  Company 

Common 

Stock 

Consolidated  Gas  Company 

n 

tt 

Edison  General  Electric  Company* 

« 

it 

National  Lead  Trust** 

tt 

tt 

Pacific  Mail  Steamship  Company 

n 

n 

Sugar  Refineries  Company*** 

tt 

it 

Tennessee  Coal  and  Iron  Company 

« 

it 

Western  Union  Telegraph  Company 

n 

tt 

The  period  selected  was  a month. 

Fluctuations  of  a period  shorter  than 

a month  were  felt  to  he  usually  of  small  sigiificance  for  the  purpose,  and  a per- 

iod  longer  than  a month  would  vitiate  many  important  movements.****  Consequent- 

ly,  an  index  number  for  each  month  of  the 

period  considered  was  made.  The  data 

for  these  index  numbers,  for  both  the  railroad  and 

the 

other  stocks,  was 

taken 

♦Name  changed  and  company  reorganized  as  "General 

Electric  Co."  in  June, 

1892. 

♦♦Name  changed  and  company  reorganized  as 

"National  Lead  Co."  in  January, 

1892. 

♦♦♦Name  changed  and  company  reorganized  as 

"American  Sugar  Refining  Company"  in 

January,  1891. 

♦♦♦♦See  a review  of  Wesley  Clair  Mitchell’ 

s Business  Cycles  by  0*M.W.  Sprague  in 

The  Journal  of  Political  Economy.  Yol.  24: 

p.  609. 

In 

this  connection  Cf 

• Cope- 

land.  M.  T..  Statistical  Indices  of  Business  Conditions 

. Quarterly  Journal  of 

Economics,  Yol.  29,  page  522. 

Both  these  articles  contain  comments  on  the  relative  merits  of  annual  and  monthlv 

data  as  an  index  of  business  conditions. 

' 


■ ■ 


. r ■ . t:  ■ 

■ ' : ' 


-• 

* ■' 

« ! . l 


„ . 


♦- 


. . , 


. 



..... 

. . ..i 

. 


-108- 


from  the  Financial  Review,  an  annual  periodical  published  by  the  same  firm  that 
publishes  the  Commercial  and  Financial  Chronicle,  In  this  journal  a monthly 
record  is  kept  of  the  highest  and  lowest  prices  for  each  month  of  the  stocks 
traded  in  on  the  New  York  Stock  Exchange*  The  monthly  index  number  for  each 
group  of  stock  prices  was  compiled  by  taking  an  arithmetical  average  between  the 
highest  and  tbs  lowest  prices  for  the  month  for  each  stock  and  then  adding  up 
these  average  prices  for  all  the  stocks  and  dividing  by  the  number  of  stocks  con- 
sidered* This  gives  what  is  known  as  an  unweighted,  arithmetical  sum  index  num- 
ber. A separate  index  number  was  so  computed  for  each  month  of  the  period.  No 
system  of  relative  indices  was  used  based  upon  a fixed  period  as  a base  or  upon 
a moving  base.  The  average  price  for  each  month  was  computed  in  the  manner  indi- 
cated and  then  entered  upon  the  graph  and  connected  by  line  with  the  average 
price  for  the  previous  month. 

There  are  several  other  methods  for  the  construction  of  an  index  number 
of  the  general  level  of  prioe  based  upon  monthly  data.  A weighted  index  number 
might  have  been  used.  This  index  number  could  have  been  weighted  on  a basis  of 
the  number  of  shares  outstanding,  the  earnings,  the  number  of  shares  sold,  the 
volume  of  sales  of  the  business,  or  upon  any  plan  that  would  in  some  manner  indi- 
cate the  relative  importance  of  the  business.  A geometric  mean  could  have  been 
used  in  place  of  tbs  arithmetical  mean.  The  median  or  mode  could  have  been  used 
in  place  of  either.  Relative  indices  could  have  been  used  based  upon  some  par- 
ticular period  as  a base,  or  else  a system  of  link  relatives  (upon  a moving  base) 
could  have  been  used*.  In  preference  to  all  of  these,  however,  the  simple,  un- 
weighted, arithmetical  mean  of  the  highest  and  lowest  prices  for  the  month  was 
used.  This  conclusion  was  reached  from  the  following  reasons :- 


♦For  a critical  discussion  of  the  various  methods  for  making  index  numbers  of  the 
prices  of  stocks  see  Mitchell,  W.  C. , A Critique  of  Index  Numbers  of  the  Prices 
of  Stocks.  The  Journal  of  Political  Economy.  Vol.  24,  pages  625-693. 


, 


* 


■ 


. 

, 


. 


r' 

. 

. 

i 

- 

. 


- 


• . I : 

■ 


-109- 


Welghting:  It  was  decided  not  to  weight  the  stocks  included  in  the  index 

number  because  no  really  satisfactory  system  of  weighting  could  he  devised  for 
the  purpose  at  hand.  If  we  take  capitalization  as  a basis,  we  are  apt  to  go 
astray,  for  the  capitalization  is  no  satisfactory  index  of  the  importance  ofcor- 
porate  enterprise.  The  same  argument  can  be  raised  against  any  system  of  weights, 
such  as  number  of  shares  outstanding,  volume  of  sales,  earnings,  or  number  of 
shares  traded  in  on  the  stock  exchange  on  the  average.  While  one  system  of 
weights  would  give  preference  to  one  factor,  it  would  neglect  the  other.  The 
problem  in  this  connection  is  a dual  one:  the  stocks  must  be  weighted  according 
to  the  importance  of  the  industry  they  represent  as  a business  enterprise,  and 
also  the  importance  of  the  stock  in  the  trading  on  the  stock  exchange.  The  im- 
portance of  corporations,  from  both  points  of  view,  varies  from  time  to  time,  and 
a constantly  shifting  system  of  weights  would  be  necessary.  While  it  might  be 
possible  to  devise  a system  of  wei Siting  that  would  serve  the  purpose  fairly  well, 
the  labor  entailed  would  be  all  out  of  proportion  to  the  gain  in  the  accuracy  of 
the  statistical  data. 

Type  of  Mean  used:  The  simple  arithmetical  mean  was  chosen  in  preference  to 

the  geometric  mean,  the  median,  and  the  mode.  The  use  of  the  median  and  the  mode 
presents  some  statistical  difficulties,  and  they  are  liable  to  be  a source  of 
error  unless  very  carefully  used.  The  geometric  mean  offers  little  more  than  the 
arithmetical  and  now  has  been  discarded  almost  entirely  for  use  in  making  index 
numbers.  The  weight  of  opinion  is  now  in  favor  of  the  arithmetical  mean  for  pur- 
poses similar  to  the  one  at  hand*. 

^v.vAbsolute  or  relative  indices:  The  last  problem  faced  in  this  connection  was 

whether,  to  use  a relative  index  number  or  an  absolute  (independent  of  any  base) 
index  nufober.  The  latter  type  of  index  number  wa3  chosen  as  the  most  representa- 
tive for  the  purpose.  It  was  desired  to  show  the  greatest  dispersion  possible, 
and  to  show  the  variations  as  they  actually  occurred,  allowing  full  emphasis  upon 
all  the  movements.  When  using  a base  made  up  of  either  one  particular  period  or 
a moving  base  (chain  or  link  relatives) , the  dispersion  of  the  various  movements 
is  not  so  great.  Further,  no  logical  reason  could  be  found  in  expressing  the 
movement  as  a percentage  of  one  kind  or  another  of  some  particular  period.  The 
writer  believes  that  much  the  force  of  the  various  movements  are  lost  when  they 
are  expressed  as  percentages. 

This  subject  has  been  involved  in  controversy  for  sometime,  and  alto- 
gether too  much  stress  has  been  laid  upon  some  of  the  so called  nre fined”  methods. 
In  this  connection  there  are  really  only  two  -problems  of  importance.  The  first 
is  the  selection  of  a representative  list,  and  the  second  is  accuracy  in  obtain- 
ing the  original  data.  Both  these  problems  have  received  much  care  and  consider- 
ation in  the  preparation  of  this  investigation. 


♦For  a discussion  of  the  relative  values  of  the  various  methods  of  preparing  in- 
dex numbers  the  reader  is  referred  to  The  Making  and  Using  of  Index  Numbers. 
Department  of  Labor,  Bureau  of  Statistics,  number  173,  The  author  of  this  pam- 
phlet is  Dr.  W.  C.  Mitchell. 


* 

_ 


: . . 


. 

. 


* 


- 


. 


: 

. 


- 


- 

. 


. 


-110- 


Some  difficulties  were  entailed  in  obtaining  a homogeneous  series  for 
the  entire  period.  It  was  desired  to  obtain  a homogeneous  series  at  all  costs. 
This  will  account  for  the  fact  that  there  are  only  eight  other  stocks  listed,  and 
that  the  railroad  group  omits  some  lines  of  considerable  importance.  The  sacri- 
fices were  made  in  the  interests  of  homogeneity. 

For  some  months  it  was  not  possible  to  obtain  quotations  for  certain  of 
the  stocks,  because  there  were  no  sales  of  the  particular  stock  in  lots  of  one 
hundred  shares  or  more.  In  these  cases  the  price  was  interpolated.  An  arithmeti- 
cal mean  was  computed  between  the  price  on  the  month  of  last  quotation  and  the 
month  when  trading  was  resumed.  It  was  thought  better  to  interpolate  the  prices 
in  this  fashion  than  to  merely  omit  that  stock  for  the  month,  because  the  index 
number  would  be  affected  one  way  or  the  other  if  the  price  of  the  stock  omitted 
did  not  happen  to  coincide  with  the  general  level,  and  hence  a false  movement  of 
price  would  be  shown  for  that  particular  month. 

One  other  problem  was  faced  that  really  admitted  of  no  satisfactory  so- 
lution. This  problem  arose  whenever  a stock  went  "ex-dividend"  or  "ex-rights". 
When  a stock  gees  "ex-dividend"  it  means  that  the  stock  transfer  books  of  the 
company  have  been  closed  and  that  stock  sold  after  this  date  will  not  be  trans- 
ferred on  the  books  of  the  company  until  after  the  dividend  is  paid.  The  new 
purchaser  will  not  receive  the  dividend  although  the  date  for  the  payment  of  the 
dividend  will  not  be  passed  by  the  time  the  sale  was  made.  Although  the  sale  may 
have  been^  say,  to-day,  and  the  date  for  the  payment  of  the  dividend  some  time  the 
following  week,  the  new  purchaser  would  not  receive  the  dividend,  which  would 
then  go  to  the  holder  of  the  shares  who  was  on  the  books  of  the  company  at  the 
time  they  were  closed.  This  is,  of  course,  only  important  for  stocks  that  pay 
dividends  regularly.  Regular  dividend  paying  stocks  will  reflect  their  approach 
to  "dividend  day"  by  a gradual  increase  in  price  to  correspond  to  tbB  amount  of 


. 


. 


* 

• • 

v 

*•  - 

. 

. 

, 


" 

- 


. 

” 


the  gradually  accumulating  dividend*.  Stocks  are  always  sold  "flat".  Now  on  the 
day  that  the  stock  goes  "ex-dividend",  the  amount  of  the  dividend  is  at  once  de- 
ducted from  the  face  of  the  stock,  e.g. , if  a stock  paying  dividends  at  the  rate 
of  3^  quarterly  closed  on  the  exchange  at  a price  of  75  and  went  ex-dividend  the 
same  evening,  the  opening  price  would  at  once  be  72,  provided  no  important  change 
took  place  in  the  market  value  of  the  stock  over  night.  A stock  that  goes  "ex- 
rights" is  not  quite  in  a similar  position.  "Ex-rigits"  may  mean  several  things, 
but,  generally  speaking,  it  means  the  rig£t  to  subscribe  for  a certain  amount  of 
new  stock  before  the  stock  is  placed  on  the  general  market.  These  rights  expire 
on  a certain  day,  and  if  they  are  thought  to  be  valuable,  the  market  price  of  the 
stock  declines  the  imputed  value  of  these  rights  after  it  goes  "ex-rights"**. 

As  soon  as  the  rights  have  been  announced,  the  value  of  them  will  be  added  at 
once  to  the  current  market  price  of  the  shares.  This  produces  a disturbance, 
then,  to  the  "normal  value"  of  the  shares.  For  this  problem,  no  solution  of  a 
satisfactory  nature  was  reached.  Rather  than  alter  the  prices  of  many  stocks 
over  a very  considerable  period  of  time,  these  disturbances  were  allowed  to  re- 
main. Of  course,  they  will  affect  the  general  level  of  the  prices  of  stocks,  but 
this  disturbance  will  be  practically  lost  in  the  general  average. 

Stocks  are  always  quoted  to  one-eighth  of  a point.  In  making  the  aver- 
ages of  prices  these  fractions  were  reduced  to  decimals  after  the  usual  method 
of  giving  two  decimal  places  after  the  point,  in  case  the  third  decimal  was  over 
five  a unit  was  added  to  the  second  place;  in  case  it  was  less  than  five,  a unit 
was  subtracted. 

So  much  for  the  period  of  1890-1900.  We  pass  now  to  a consideration  of 
the  preparation  of  the  index  number  for  the  period  1900-1918. 

The  index  number  of  stock  prices  for  the  period  1900-1918  is  that  com- 

* Gibson,  Thomas,  The  Cycles  of  Speculation. 

**Ibid. 


■ 


. . 


■ . 


f • 


. 


■ 

. 

.... 


. 


I 


. 


- 


-112- 


piled  "by  the  Dow- Jones  Company  in  their  publication,  The  Wall  Street  Journal* 
These  figures  have  been  conveniently  summarized  in  The  Review  of  Economic  Statis- 
tics. Preliminary  Volume,  Number  2,  published  by  the  Harvard  University  Commit- 
tee on  Economic  Research.  The  index  number  has  been  taken  from  the  tables  pub- 
lished in  this  volume  of  The  Review,  because  of  the  convenient  form  in  which  the 
figures  were  given,  and  also  from  the  fact  that  a great  deal  of  time  could  be 
saved  by  so  doing,  at  practically  no  expanse  of  accuracy,  for  the  compilations 
made  by  The  Review  have  been  made  with  great  care  and  precision  and  we  have  every 
reason  for  faith  in  their  accuracy.  Further,  it  was  not  felt  advisable  to  dupli- 
cate any  work  along  these  lines  that  had  already  been  done  well  and  carefully. 

The  index  number  for  both  the  railroad  group  and  the  other  stocks 
group  was  obtained  from  this  same  source.  We  will  first  examine  the  railroad 
group. 


In  July,  1905,  the  Dow-Jones  list  of  twenty  railroad  stocks  contained 

the  following  share st- 

At  chi  son,  Topeka,  and  Santa  Fe 
Brooklyn  Rapid  Transit  Company 
Canadian  Pacific 
Delaware  and  Hudson 
Chicago  and  Northwestern 
Chicago,  Milwaukee,  and  St.  Paul 
Ivfetropolitan  Street  Railway 
Erie 

Louisville  and  Nashville 
Northern  Pacific 
Missouri  Pacific 
N.  Y.  Oentral 
Pennsylvania 
Philadelphia  and  Reading 
Southern  Pacific 
Southern 
Union  Pacific 
Norfolk  and  Western 
Baltimore  and  Ohio 
Illinois  Central 


♦This  data,  as  well  as  the  actual  index  number  of  railroad  stocks  was  taken  from 
The  Review  of  Economic  Statistics.  Prel.  vol.  2.  The  information  and  data  rela- 
tive to  the  index  number  of  other  stocks  was  obtained  from  this  source  also. 


Railroad, 

Common  Stock 

n 

n 

n 

« 

tt 

n 

* 

n 

n 

n 

tt 

tt 

n 

« 

it 

tt 

tt 

n 

tt 

n 

n 

n 

it 

it 

n 

n 

n 

n 

tt 

n 

n 

tt 

it 

n 

tt 

n 

tt 

it 

tt 

n 

it 

it 

n 

it 

it 

it 

ti 

n 

it 

tt 

it 

tt 

it 

it 

n 

I 


. 

t • 

..  • :•  • k :.v  ••  • 

. • 

. ■ -1.! 

I 

: 


. . 


-113- 


On  May  4th,  1906,  the  Twin  City  Rapid  Transit  Company  was  added  to  this 
list,  and  the  Metropolitan  Street  Railway  dropped.  The  average  was  raised  12/100 
of  one  per  cent  hy  this  change.  On  April  25th,  1912,  Brooklyn  Rapid  Transit  Com- 
pany, and  the  Twin  City  Rapid  Transit  Company,  were  dropped  from  the  list  and  re- 
placed hy  The  Lehigh  Valley  Railroad  and  the  Rock  Railroad  respectively.  The  aver- 
age was  raised  41/100  of  one  per  cent  hy  these  changes.  On  December  12th,  1914, 
The  Chicago  and  Northwestern  Railroad,  The  Rock  Island  Railroad,  the  The  Missouri 
Pacific  Railroad  were  dropped  from  the  list  and  were  replaced  hy  ChesapeakB  and 
Ohio  Railroad,  The  Kansas  City  Southern  Railroad,  and  The  New  York,  New  Haven,  and 
Hartford  respectively.  The  average  was  lowered  2.96$  hy  these  changes.  No  fur- 
ther changes  were  made  in  the  list  of  railroad  stocks  for  the  remainder  of  the 
period  that  we  consider.  We  pass  now  to  an  examination  of  the  index  number  of 
other  stocks. 

In  July,  1905,  the  Dow-Jones  list  of  twelve  "industrial  stocks"  (the 
term  "other  stocks"  is  used  throughout  in  this  inquiry  as  it  was  thought  to  he 
more  descriptive  of  the  stocks  than  the  term  "industrial  stocks",  which  is  used  hy 
the  Dow-Jones  Company)  contained  the  following  shares :- 


American  Smelting  Company 
Amalgamated  Copper  Company 
U.  S.  Rubber  Company 
National  Lead  Company 
U.  S.  Steel  Corporation 
People* s Gas  Company 
U.  S.  Rubber  Company 
U.  S.  Steel  Corporation 
American  Sugar  Refining  Company 
Tennessee  Coal  and  Iron  Company 
Colorado  Fuel  and  Iron  Company 
American  Car  and  Foundry  Company 


Common 

« 

1st  Preferred 
Common 
Preferred 
Common 

n 

n 

n 

tt 

n 

n 


On  November  7th,  1907,  The  Tennessee  Coal  and  Iron  Company  was  dropped 
from  the  list  and  was  replaced  hy  The  General  Electric  Company  (common).  The 
average  was  lowered  4/100  of  one  per  cent  hy  this  change.  On  May  11th,  1912,  The 
Colorado  Fuel  and  Iron  Company  was  dropped  and  was  replaced  hy  The  Central  Leather 

_j 


, 

. 


■ 


. 


. 


: 


- 
■ 


. 


• • 


. 


Company  (common).  The  average  was  lowered  2l/l00  of  one  per  cent  by  this  change. 
These  were  the  only  changes  made  in  this  list  up  to  the  time  of  the  closing  of 
the  New  York  Stock  Exchange  in  1914.  After  the  re-opening  of  the  Exchange  in  1914 
the  Dow-Jones  Company  began  using  a list  made  up  of  20  "industrial  stocks".  The 
period  during  which  the  stock  exchange  was  closed  gives  the  second  break  in  our 
index  number  of  stock  prices.  After  the  re-opening  of  the  exchange,  the  list  of 
twenty  stocks  was  used  instead  of  the  list  of  twelve  stocks,  although  the  list  of 
twelve  stocks  was  compiled  as  far  as  1916,  It  was  felt  to  be  more  advisable  to 


use  the  larger  and,  perhaps,  more  representative  list.  Accordingly,  the  index 


number  for  the  other  stocks  group  for  the  period  1914-1918  is  composed  of  twenty 
stocks,  as  conpiled  by  the  Dow-Jones  Conpany.  Those  twenty  stocks  are:- 


American  Beet  Sugar  Company 

American  Can  Company 

American  Car  and  Foundry  Company 

American  Locomotive  Company 

American  Smelting  and  Refining  Company 

American  Sugar  Refining  Company 

American  Telephone  and  Telegraph  Company 

Anaconda  Copper  Mining  Company 

Baldwin  Locomotive  Company 

Central  Leather  Conpany 

General  Electric  Conpany 

Goodrich  Tire  and  Rubber  Conpany 

Republic  Iron  and  Steel  Conpany 

Stude baker  Automobile  Conpany 

The  Texas  Oil  Conpany 

U.  S.  Rubber  Conpany 

U.  S.  Steel  Corporation 

Utah  Copper  Mining  Company 

Westinghouse  Electric  Conpany 

Western  Union  Telegraph  Conpany 


Common  Stock 


n 

ti 

it 

n 

ti 

n 

n 

it 

« 

n 

n 

n 

n 

n 

n 

it 

n 

n 

n 


n 

« 

n 

it 

it 

n 

n 

n 

it 

n 

n 

it 

n 

it 

it 

n 

ti 

n 

it 


No  changes  were  made  in  the  list  of  twenty  stocks  for  the  period  under 
consideration. 

Both  groups  of  stocks,  the  railroad  stocks  and  the  industrial  stocks, 
were  worked  into  index  numbers  in  the  same  manner.  Both  sets  of  data  were  ob- 
tained from  The  Review  of  Economic  Statistics.  The  monthly  indices  were  obtained 


by  taking  the  average  daily  high  and  low  figures  for  each  security  and  conputing, 


- 

. ■ 

» 

. 

V 

• 

. 

. 

- - 


' 


. : 


• > » - - • a i*  1 * " 


-115- 


on  the  basis  of  the  arithmetical  mean,  between  the  high  and  the  low  prices,  the 
index  number  for  the  month.  Thus  the  index  numbers  for  the  period  1900-1918  were 
compiled  in  essentially  the  same  fashion  as  were  those  for  the  period  1890-1900. 
The  Dow-Jones  figures  were  used,  because  the  work  of  compilation  had  already  been 
done,  and  because  these  figures  had  survived  the  test  of  time  and  were  familiar  to 
students  of  this  type  of  data. 

The  nature  and  source  of  the  data  for  the  index  numbers  of  the  prices 
of  stocks  has  now  been  examined  in  some  detail  and  we  are  now  ready  to  see  just 
how  these  indices  were  plotted  on  the  chart. 

On  this  chart  the  horizontal  axis  (x  axis,  co-ordinate,  or  the  abcissa, 
as  it  is  sometimes  called)  represents  the  element  of  time.  It  is  divided  into 
spaces  one  quarter  of  an  inch  long  along  its  lower  and  upper  boundary,  each  quar- 
ter inch  space  representing  one  month.  Every  three  inches  a vertical  line  is 
drawn  across  the  chart  which  indicates  the  yearly  divisions.  Along  the  vertical 
axis  (y  axis,  co-ordinate,  or  ordinate,  as  it  is  sometimes  called)  the  chart  was 
divided  into  one  quarter  inch  spaces,  each  quarter  inch  indicating  one  point  of 
quantitative  measure.  In  the  case  of  the  index  number  of  stocks,  one  quarter  inch 
represented  one  point  in  the  prices  of  stocks.  At  every  ten  points  a horizontal 
line  was  drawn  across  the  chart  to  facilitate  measurement  and  comparison.  In  the 
case  of  the  stocks  the  base  line  begins  with  forty  instead  of  zero.  This  was  done 
to  conserve  the  size  of  the  chart.  The  index  numbers  of  the  general  price  level 
of  stocks  were  then  entered  in  their  proper  place  relative  to  the  elements  of  time 
and  quantity  which  the  number  represented.  The  index  numbers  were  then  connected 
by  heavy  lines;  a solid  line  being  used  in  the  case  of  the  railroad  stocks,  and  a 
broken  line  used  in  the  case  of  the  other  stocks.  A small  circle  was  drawn  about 
each  index  number,  except  for  the  months  of  January  of  each  year,  wbsn  a slightly 
larger  circle  was  drawn.  This  was  done  to  facilitate  the  location  of  the  various 
points  on  the  graph.  This  graph  will  be  found  appended  to  the  end  of  this  inves- 


■ • 


•*<k 


' • 

- - 

' 


* 


. 


- 


1 


. 


-116- 


ti gat ion. 

We  can  now  proceed  to  examine  in  similar  fashion  the  various  other 
groups  of  indices  used  in  this  inquiry.  We  will  begin  with  the  "Dividends  and 
Earnings  Group". 

Dividends  and  Earnings  Group: 

This  group  is  composed  of  the  following  factors:-  Earnings,  gross,  of 
ten  leading  railroads;  earnings,  gross,  of  the  railroads  used  in  the  preparation 
of  the  index  number  of  railroad  stock  prices;  dividend  payments,  railroads  used 
on  the  index  number;  dividend  payments,  all  railroads;  dividend  payments,  corpor- 
ations who se  stocks  were  used  in  the  preparation  of  the  index  number  of  other 
stocks.  Each  factor  will  be  considered  separately. 

Gross  earnings  of  ten  leading  railroads:-  Thfs  <data  -was- taken  from  The  Re- 


view of  Economic  Statistics,  where  it  was  obtained  from  Babson's  Desk  Sheet. 
Since  access  was  not  to  be  had  to  a complete  file  of  these  desk  sheets,  the  data 
ia&«£taken  from  The  Review.  The  ten  leading  railroads  are:  Atchison,  Topeka,  and 


A 


Santa  Fe;  Atlantic  Coast  Line;  Baltimore  and  Ohio;  Central  of  New  Jersey;  Illinois 
Central;  Missouri,  Kansas,  and  Texas;  Pennsylvania;  Chicago,  Hock  Island  and  Pa- 
cific; Southern  Eailway;  and  Union  Pacific.  These  railroads  embrace  at  least  25$ 


__ 

of  the  earnings  of  all  the  roads  in  the  United  States.  The  data  is-  monthly,  and 

A 

begins  with  January  1912,  and  ends  in  June  1917.  Only  three  significant  figures 
were  used  in  connection  with  th£s-edata,  and  the  decimal  point  was  placed  after  the 
second  figure.  The  earnings  are  thus  reported  in  millions  of  dollars  carried  to 
the  first  decimal  place.  In  plotting  these  figures  on  the  graph,  the  same  scale 
was  used  as  in  the  case  of  the  index  numbers  of  stock  prices;  time  element  along 
the  horizontal  axis,  and  millions  of  dollars  of  earnings  along  the  vertical  axis. 
The  various  points  for  each  month  were  connected  by  a solid  line.  A glance  at 
the  graph  will  show  Just  how  this  ha-a  been  done. 

Stoss  Earnings  of  railroads  used  on  Index  Number:-  Thfsedata  was -obtained 


: 

\ v .1  ■ ' 

* 


' * ' 


. 


: 


. 


■ 

■ • 


: 


-117- 


from  the  Statistical  Eeport  of  the  Interstate  Commerce  Commission.  The  data  was 

obtained  for  the  period  1890-1907.  After  1907  the  Commission  changed  its  system 

of  reporting  earnings,  which  made  it  impossible  to  secure  a homogeneous  series 

Ojju 

past  this  point.  The  data  4s- annual  and  but  three  significant  figures  were  used, 

A 

so  the  data  was  reported  in  millions  of  dollars  to  the  first  decimal  point  as  the 
gross  earnings  of  ten  leading  railroads  was  reported.  The  data^waaTentered  upon 
the  graph  in  a similar  manner  to  that  of  the  gross  earnings  of  ten  leading  rail- 
roads,  except  that  in  this  case  the  data^waa  annual  instead  of  monthly,  and  the 
points  on  the  graph  were  connected  by  dotted  lines. 

Dividend  Payments  of  Railroads  used  in  the  Index  Number:-  The  data  for  this 

VrOJL^  K-**'*- 

fac tor  fwas- obtained  from  The  Financial  Review.  In  this  source  the  data  was- re- 
ported in  whole  numbers  and  fractions.  For  purposes  of  plotting  it  upon  the  graph 
the  fractions  were  translated  into  decimals,  and  the  decimal  point,  instead  of  be- 
ing placed  after  the  first  whole  number,  were  placed  after  the  first  decimal  point 
that  is  to  say,  the  decimal  point  was  shifted  one  place  to  the  right.  This  was 
done  to  bring  out  the  fluctuations  in  the  dividend  payments  more  clearly  than 
would  have  been  the  case  if  the  decimal  point  had  been  placed  in  its  regular  place 
The  dividends  were  obtained  for  all  the  railroads  used  in  preparing  the  index  num- 
ber of  stock  prices  for  the  respective  periods.  Whenever  a change  of  company  was 
made,  this  change  was  also  made  in  obtaining  the  dividends,  so  the  dividend  figure 
actually  represents  the  dividends  paid  out  by  the  railroads  used  on  t he  index.  In 
plotting  these  figures  on  the  graph,  a line  composed  of  dashes  was  used  to  dis- 

<Xkj- 

tinguish  it  from  the  other  lines.  The  data,  of  course,  ie^ annual  in  its  nature. 

CKx_ 

Dividend  Payments  of  All  Railroads:-  This  <.  data  ie  of  an  annual  nature  and 
was  included  as  a supplement  to  the  "Dividend  Payments  of  Railroads  used  on  the 
Index",  so  as  to  give  a check  on  the  representative  character  of  the  index  number. 

VrUc 

The  data^wae-  obtained  from  The  Statistical  Report  of  the  Interstate  Commerce  Com- 
mission.  In  this  case  the  data ^was- obtained  to  two  decimal  places.  Again  the 


- 


■ 


I 


• ■ 


, 


. 


. 


' +w  c 


. 


, 


: 


-118- 


decimal  point  was  moved  one  place  to  the  ri$it  to  lay  emphasis  on  its  movements. 

It  was  plotted  to  the  same  scale  that  all  the  other  graphs  - in  fact,  the  same 
scale  has  been  used  throughout  in  plotting,  and  is  the  same  for  the  index  numbers 
of  the  prices  of  stocks  and  all  the  other  indices.  A line  composed  of  one  dash 
and  one  dot  was  used  to  connect  the  points  on  the  chart  in  order  to  distinguish  it 
from  the  other  lines. 

Dividend  Payments  of  Corporations  used  in  the  Preparation  of  the  Index  Number 
of  Other  Stocks:-  This  data  is  also  annual  in  character  and  was  obtained  from 
The  Financial  Review.  The  decimal  point  was  moved  one  place  to  the  right  in  plot- 
ting the  items  upon  the  graph  for  the  reason  already  given.  It  was  plotted  in  the 
same  manner  that  the  other  dividends  were  plotted  except  that  the  items  on  the 
chart  were  connected  by  a line  made  up  of  one  dash  and  three  dots.  All  the  cor- 
porations used  in  the  preparation  of  the  other  stocks  index  number  were  used,  and 
whenever  a change  of  corporation  was  made  on  the  index,  a similar  change  was  made 
in  the  dividends. 

This  concludes  the  description  of  the  data  and  graphs  for  the  Earnings 
and  Dividends  Group.  All  the  indices  mentioned  and  included  were  plotted  on  the 
same  chart  for  convenience  in  comparison.  This  chart  will  be  found  at  the  end  of 
this  paper,  and  should  be  studied  in  the  light  of  the  material  given  in  this  chap- 
ter. We  pass  now  to  a consideration  of  the  next  group. 

Monetary  and  Banking  Gkouu:- 

This  group  is  composed  of  the  following  factors: 

Interest  Rates:  Demand  Loans  on  the  New  York  Stock  Exchange 

Rate  on  60-90  day  commercial  paper 
Rate  on  4-6  months  commercial  paper 
Average  rate  of  interest  on  10  An.  RR  Ronds 

Average  Reserves,  New  York  City  Banks 
Average  Loans,  New  York  City  Banks 
Average  Deposits,  New  York  City  Banks 


Total  amount  of  Money  in  Circulation  in  the  United  States 


V • • : ' 


: 'J 


: / .v  ; ' 


: 

• . -..J .. 

' 

•.••'I, 


- 


. 


. 


: 


: 


. 


: 


, ■ ' '■ 


-119- 

Interest  Rates:-  The  data  for  all  the  Interest  rates  was- taken  from  The  Re- 


view  of  Economic  Statistics,  where  ft  had  been  obtained  from  various  sources; 
much  coming  from  Business  Cycles  by  Wesley  Clair  Mitchell,  which  was  sup- 

plemented by  The  Commercial  and  Financial  Chronicle*  The  methods  used  in  the 
compilation  of  these  interest  rates  have  been  investigated,  and  the  rates  are 
believed  to  be  accurate  and  representative*.  The  interest  rates  were  computed 
to  two  decimal  places  in  all  instances.  In  plotting  the  interest  rates  on  demand 
loans,  60-90  day  commercial  paper,  and  4-6  months  commercial  paper,  the  decimal 
point  was  left  in  its  normal  place.  In  the  case  of  the  interest  rate  on  the  ten 
American  railway  bonds,  the  decimal  point  was  moved  one  place  to  the  right.  This 
was  done  to  prevent  confusion  on  the  chart  which  would  have  resulted  from  the 
movements  of  the  four  rates,  since  they  moved  together  so  closely,  and  also  to 
bring  out  the  fluctuations  in  this  rate,  which  would  have  been  obscure  had  a 
smaller  unit  been  used.  The  rate  for  demand  loans  at  the  New  York  Stock  Exchange 
is  the  rate  on  "call"  money  for  use  in  the  financing  of  the  purchase  and  sale  of 
securities.  This  rate  is  subject  to  extreme  fluctuations,  and  is  of  great  impor- 
tance in  connection  with  the  general  level  of  prices  of  stocks.  On  the  chart 
this  rate  is  shown  by  a thin  dotted  line.  The  rate  of  interest  on  60-90  day  com- 
mercial paper  is  the  rate  on  choice  double  name  commercial  paper  running  sixty 
to  ninety  days.  This  rate  is  of  much  importance  in  connection  with  the  state  of 
business  enterprise.  It  is  represented  on  the  chart  by  a thin  double  line.  The 
rate  of  interest  on  4-6  months  commercial  paper  is  the  rate  on  good  single  name 
paper  running  from  four  to  six  months.  This  rate  is  of  much  importance  in  con- 
nection with  the  state  of  business  enterprise.  It  is  represented  on  the  chart 
by  a thin  line  made  of  dashes.  The  rate  of  interest  on  ten  American  railway 

*Eor  the  method  used  in  obtaining  the  various  interest  rates  see  The  Review  of 
Economic  Statistics,  Preliminary  Vol.  1,  No.  1,  pp  45-47,  or  Mitchell,  W.  C., 
Business  Cycles,  pp  141-175. 


: 

- 


, 

« 


. - 


. 

‘ ' 

, , : 

. 

. 

. 

. 

. 

. 


. 


, • ' 


-120- 

bonds  is  a computation  of  the  yield  of  ten  selected  railway  bonds*.  This  rate 
is  of  much  importance  in  considering  the  state  of  the  investment  market.  It  is 
represented  on  the  chart  by  a thin  solid  line.  The  data  for  all  the  interest 
rates  is  monthly  - a monthly  average  of  the  various  quotations  of  the  month  is 
made,  and  this  average  is  held  to  be  the  characteristic  rate  for  the  month.  The 
period  embraced  by  all  these  interest  rates  is  from  1890-1918. 

Average  Reserves,  Average  Loans,  Average  Deposits  of  New  York  City  Banks: 

"fCu/y  VrCc*— 

Thtsedata  -ie-all  monthly  in  character.  4%+rrar  obtained  from  The  Review  of  Eco- 

* A 

'TOju.-y^L 

nomic  Statistics**,  where  irt-waa  obtained  from  a variety  of  sources.  The  methods 


Ou^ 

employed  by  this  Journal  have  been  investigated  and  the  data^e-believed  to  be 
accurate  and  representative.  The  average  reserves  of  the  New  York  City  banks  are 
the  monthly  average  of  the  total  reserves  of  all  the  New  York  City  Clearing  House 
banks.  This  figure  will  represent  the  average  reserves  of  the  total  that  all  the 
various  banks  belonging  to  the  clearing  house  carried  for  the  month  in  question. 
The  figures  are  carried  from  1890-1914.  After  1914,  the  Federal  Reserve  System 
was  inaugurated,  and  it  was } therefore, not  possible  to  secure  a significant,  homo- 
geneous, series  beyond  that  point.  The  data^e1  reported  in  millions  of  dollars 
and^t£~ carried  to  one  decimal  place  on  this  basis.  In  entering  this  data  upon 
the  chart  the  decimal  point  was  moved  one  place  to  the  left*  and  so,  for  purposes 
of  this  study,  we  may  consider  the  figures  as  reported  in  ten  millions  of  dollars. 
The  decimal  point  was  moved  to  reduce  the  extreme  dispersion  of  this  series,  and 
also  to  make  it  possible  to  plot  the  movements  on  a chart  of  reasonable  size. 

With  the  decimal  point  at  this  place,  the  fluctuations  show  nicely,  and  are  en- 

QjlA. 

tirely  satisfactory  for  the  purpose.  This  d at  a^ie-"  shown  on  the  chart  by  a heavy 
dotted  line.  The  average  loans  of  the  New  York  City  Banks  are  the  average  month- 

*For  the  method  used  in  compiling  this  rate  see  The  Review  of  Economic  Statistics. 


Pelindnary  Vol.  1,  No.  1,  page  45;  or  Mitchell,  W.  C. , Business  Cycles,  pp  141-14J 
**For  the  method  used  in  compiling  this  data  see  The  Review  of  Economic  Statis- 
tics. Prel.  vol.  1,  no.  2,  pp  149-151. 


- 

- 

* 

. 


: 


. 

. 


- 


. 

. 

. 

. 

• R • -tii 


, ; !.' 


. 


- 


- 


....  , 

- • ■' 


-121- 


ly  loans  of  all  the  banks  in  the  New  York  Clearing  House  Association.  The  fig- 
ures are  carried  from  1B90-1914.  After  1914,  trust  companies  were  included  in 

the  Clearing  House  returns,  and  it  was  not  possible  to  obtain  a homogeneous  ser- 

YcUJL. 

ies  past  that  date  without  considerable  difficulty.  The  data^ was- originally 
reported  in  millions  of  dollars,  but  for  convenience  in  plotting  the  items  on 
the  chart,  the  decimal  point  was  moved  one  place  to  the  left,  and  so  the  figures 
on  the  chart  are  in  ten  millions  of  dollars  carried  to  one  decimal  place.  This 
step  was  taken  to  keep  the  chart  within  a reasonable  size.  The  fluctuations  are 

<JUX- 

clear  and  distinct  upon  this  basis.  Thie«data^tr  shown  upon  the  chart  by  a 
heavy  line  composed  of  one  dash  and  one  dot.  The  monthly  average  deposits  of 
New  York  City  Banks  are  the  average  deposits  for  a month  of  all  the  banks  in  the 
New  York  Clearing  House  Association.  The  figures  are  carried  from  1890-1914. 
After  1914  it  was  not  possible  to  obtain  a series  homogeneous  with  the  prior 
period  because  trust  companies  were  included  in  the  returns  made  by  the  Clearing 
House.  The  deposits  were  originally  reported  in  terms  of  one  million  dollars, 
but  for  convenience  in  plotting  upon  the  chart,  the  decimal  point  was  moved  one 
place  to  the  left,  and  so  the  figures  on  the  chart  are  in  terms  of  ten  million 

dollars  carried  to  one  decimal  place.  Thtstdata  i-r  represented  upon  the  chart 

(l 

by  a heavy  line  composed  of  dashes. 

Total  Amount  of  Money  in  Circulation  in  the  U.  S.  by  Months:  Thiscdata  wsse 

A 

obtained  from  The  Annual  Reports  of  the  Secretary  of  the  Treasury  (financial) 
and ¥*,  of  course,  an  estimated  figure,  because  we  have  no  means  of  telling  just 
how  much  money  is  in  circulation,  due  to  the  loss  and  destruction  of  a certain 

amount.  The  estimate  is  accurate  enough,  however,  for  the  purpose.  Tte  data  te- 

A 

OuU. 

monthly  in  character  and^e  reported  in  hundreds  of  millions  of  dollars  carried 
to  two  significant  decimal  places.  The  data  extend^  from  1890-1918,  and  in- 
clude^ all  kinds  of  money.  The  data  i-r~ represented  on  the  chart  by  a heavy  solic 
line. 


- 

. - - 8. 

* 

. 


- 

- 

* 

. 


. 

. 

: , . • 


. 

. 

- 


-122- 

Thls  concludes  our  description  of  the  nature  and  source  of  the  data, 
and  the  preparation  of  charts  for  the  monetary  and  hanking  group*  All  the  indi- 
ces in  this  group  have  been  included  on  one  large  chart,  which  will  be  found  ap- 
pended to  this  investigation.  We  pass  now  to  a discussion  of  the  Business  Enter- 
prise Group. 

Business  Enterprise  Group 

For  convenience  in  plotting  upon  the  chart,  and  also  to  prevent  confu- 
sion in  studying  the  chart  this  group  has  been  divided  into  two  parts,  parts  one 
and  two,  respectively.  It  is  not  claimed  that  this  division  is  a logical  one,  it 
was  made  chiefly  in  the  interests  of  convenience  and  simplicity. 

Business  Enter-prise  Gfroun.  Part  I:- 

Part  one  of  this  &r oup  consists  of  the  following  indices:  Monthly  Bank 
Clearings  in  New  York  City;  Monthly  Bank  Clearings  outside  New  York  City;  Un- 
filled Orders  of  the  United  States  Steel  Corporation;  Yearly  Listings  of  Stocks 
on  the  New  York  Stock  Exchange;  Yearly  Listings  of  Bonds  on  the  New  York  Exchange, 
Monthly  Bank  Clearings  in  New  York  City  and  Outside  New  York  City:  The  data 

VrU*_ 

for  these  factor s^was- obtained,  for  the  period  1890-1902,  from  the  Commercial  and 
Financial  Chronicle,  and  for  the  period  1903-1918  from  The  Beview  of  Economic 
Statistics.  The  series  is  homogeneous,  because  The  Beview  used  The  Chronicle  as 
its  source  in  gathering  thftsedata,  and  their  method  employed  in  gathering  the 
data  was  the  same  as  that  employed  by  the  writer  of  this  paper.  The  Review  was 
used  in  order  to  save  time  in  the  compilation  of  the  data,  and  because  it  was 

felt  that  there  would  be  no  benefit  derived  from  a duplication  of  work  done  well 

ag- 
ones already.  The  data4r*  reported  in  terms  of  hundreds  of  millions  of  dollars 

carried  to  one  decimal  place.  The  bank  clearing  in  New  York  are  shown  on  the 

chart  ty  a line  composed  of  dashes.  The  bank  clearings  outside  New  York  are 

shown  by  a line  composed  of  dots. 


' 

1 

. .V  ' • - 


: 

■ 

» . ' *;>! 

■ - • . . 


"V  • 

' 

■ 

. 

. ..r  • .I*  jjj 

, 

. 

. 


* 


-123- 

Wco— 

Unfilled  Orders  of  the  U.  S.  Steel  Corporation:  Thtstdata^was-'-obtained 

"VrClA- 

from  The  Review  of  Economic  Statistics.  Th£a«xLata^far  in  turn  obtained  from 
The  Commercial  and  Financial  Chronicle  and  also  directly  from  officers  of  the 
U.S.  Steel  Corporation.*  The  data  extends  from  1903-1918.  From  1902  to  1910, 


OjuC 


\KkJuu  OjJ-' 

•4r£U* 


monthly  in  character.  In  The 


the  data^-e  reported  quarterly,  thereafter^ 

l/VOO^ 

Review  the  data^was  reported  in  terms  of  ten  thousand  tons,  but  for  convenience 
in  plotting  upon  the  chart,  the  decimal  point  has  been  moved  one  place  to  the 
left,  and  so  the  items  plotted  upon  the  chart  are  in  terms  of  hundreds  of  thous- 
ands  of  tons  carried  to  the  first  decimal  point.  Th4.s< data  -ire-  represented  upon 


A 


the  chart  by  a solid  line. 


Yearly  Listings  of  Stock  and  Yearly  Listings  of  Bonds  on  the  New  York  Stock 

Exchange:  Thisedata  i®-  annual  in  character  and  wae  obtained  from  The  Financial 

A A — 

Review.  It  extends  from  1890-1917.  The  items  are  reported  in  terms  of  ten  mil- 
lions of  shares  or  bonds  carried  to  the  first  decimal  place.  The  stocks  are 
shown  on  the  chart  by  a line  composed  of  one  dash  and  one  dot  and  the  bonds  are 
shown  by  a line  composed  of  one  dash  and  three  dots. 

All  the  above  indices  have  been  plotted  as  indicated  upon  one  large 
chart,  which  will  be  found  appended  to  this  paper. 

Business  Enterprise  Gkoun.  Part  2:- 

This  group  is  composed  of  the  following  indices:  Monthly  Business 

Failures;  New  Incorporations  in  the  Eastern  States  involving  more  than  $1,000,000 
Monthly  Tonnage  of  Pig  Iron;  Monthly  Values  of  Building  Permits  Issued  by  twenty 
Leading  Cities;  and  Shipments  of  Anthracite  Coal. 

Monthly  Business  Failures:  This«d.ata -was-  taken  from  The  Review  of  Economic 

OuJL- 

Statistlcs.  -Xt44rs  there  reported  from  Bradstreet's  in  units  of  one  failure.  For 

use  in  plotting  thisedata  on  the  chart  a unit  composed  of  hundreds  of  business 

♦For  the  exact  method  employed  in  collecting  thfestdata  see  The  Review  of  Econom- 
ic Statistics,  prel.  vol.  1;  No.  1;  pp  43  and  80. 


: - • 

. 

- 


* 

♦ 


: 


-124- 


failures  was  used,  carried  to  two  decimal  places.  The  data  extend^  from  1893- 

TLajl.  ao_ 

1918  and  is  monthly  in  character.  -Lfc-W- repre sented  on  the  chart  by  a dotted 

A 

line. 

New  Incorporations  in  the  Eastern  States  Involving  $1,000,000  or  more: 
Thtsedata  i#- monthly  in  nature  and  was-  takBn  from  The  Review  of  Economic  Statis- 

I Cuuy 

tics,  where  had  been  compiled  from  The  New  York  Journal  of  Commerce.  The  da- 
ta extends  from  1901-1918  and  ^^represented  on  the  chart  by  a line  composed  of 

A 

dashes.  The  original  items  were  in  terms  of  one  million  dollars  of  authorized 
capital  stock,  but  for  purposes  of  plotting  upon  the  chart,  they  are  recorded  in 
terms  of  ten  millions  of  dollars  carried  to  one  decimal  place. 

OUUL 

Monthly  Tonnage  of  Pig  Iron:  Thlsedata  4e-monthly  in  nature  and  was  taken 

from  The  Review  of  Economic  Statistics,  where  ..it-  fhad  been  compiled  from  The  Iron 


A 

Acs.  The  data  extend^  from  1903-1918.  The  original  items  were  reported  in  The 
Review  in  terms  of  one  thousand  tons,  but  for  purposes  of  plotting  upon  the 
chart,  they  were  recorded  in  terms  of  one  hundred  thousands  of  tons,  carried  to 

&OL 

two  decimal  places.  The  data  4*.  represented  on  the  chart  by  a solid  line. 

Monthly  Values  of  Building  Permits  Issued  by  Twenty  Leading  Cities:  Th£s«- 

data  'is-  monthly  in  nature,  and  was  taken  from  The  Review  of  Economic  Statistics. 


it  had 


where  4rt  had  been  compiled  from  Babson * s Desk  Sheet.  The  data  extend^  from 
1903-1918.  The  original  items  were  reported  in  terms  of  one  hundred  thousand 
dollars,  hit  for  purposes  of  plotting  on  the  chart,  they  were  recorded  in  terms 
of  millions  of  dollars  carried  to  one  decimal  place.  The  datable  represented 
on  the  chart  by  a line  composed  of  one  dash  and  one  dot. 

Shipments  of  Anthracite  Coal:  Thlsedata -is  annual  in  character  for  the 

A 

period  1890-1900,  and  monthly  in  character  from  1900  to  1917.  It  was  not  possi- 
ble to  secure  a homogeneous  series  composed  of  monthly  data  throughout.  Since 
the  annual  data  differ^  from  the  monthly  data,  the  line  on  the  graph  is  broken 


. 

. 


4 

. 

« 

: 

* 

- 

■ 


-125- 


Vrt-o^- 

at  this  point  and  is  not  connected*  The  data  wete- obtained  from  The  Financial 

Review.  -It-Li-e-  here  recorded  on  the  chart  in  terms  of  one  million  tons  carried 
A 

OJL>— 

to  one  decimal  place.  The  data  4-s~  represented  on  the  chart  by  a line  composed 


of  one  dash  and  three  dots. 

All  these  indices  were  plotted  upon  a graph  to  the  usual  scale,  as 
indicated  in  a previous  paragraph.  The  next  group  to  occupy  our  attention  is 
"The  Crop  Production  Group". 


Cron  Production  Grout)  ?- 

This  group  is  composed  of  the  following  indices:  Production  of  wheat, 

corn,  oats,  cotton,  and  potatoes  in  the  United  States.  The  datable-  entirely 
annual  in  character  and  extend^  from  1891-1917.  It  was  obtained  from  Tbs  Pi- 

*tUU4 

nancial  Review,  where  had  been  obtained  from  the  official  reports  of  the 
United  States  Department  of  Agriculture.  Wheat  is  here  recorded  in  terms  of 
ten  millions  of  bushels,  carried  to  one  decimal  place  and  is  represented  on  the 
chart  by  a solid  line.  Corn  is  here  recorded  in  units  of  one  hundred  million 
bushels  carried  to  one  decimal  place  and  is  represented  on  the  chart  by  a line 
composed  of  one  long  and  one  short  dash.  Oats  are  here  recorded  in  terms  of 
ten  million  bushels  carried  to  one  decimal  place,  and  is  represented  on  the 
chart  by  a line  composed  of  one  dash  and  three  dots.  Cotton  is  here  recorded 
in  terms  of  ten  million  bales,  carried  to  one  decimal  place,  and  is  represented 
on  the  chart  by  a line  composed  of  dashes.  Potatoes  are  recorded  in  units  of 
ten  million  bushels,  carried  to  one  decimal  place,  and  are  represented  on  the 
chart  ty  a line  composed  of  one  dot  and  one  dash. 

All  of  these  indices  were  plotted  on  one  chart  to  the  usual  scale. 

The  next  group  for  consideration  is  "The  Commodity  Price  Group". 

Commodity  Price  Group 

This  group  is  composed  of  index  numbers  of  the  prices  of  raw  commodi- 


.• 


. 


. 

- 


■ 


” 


* 


. 


. 


. 


* 

* 

. 

• : 


-126- 

ties,  manufactured,  commodities,  and  all  commodities.  All  three  of  these  index 
numbers  are  the  United  States  Bureau  of  Labor  Wholesale  Indices  of  Commodity 

QJJL 

Prices*.  The  wholesale  prices  are  the  better  prepared,  and^also  the  better  a- 
dapted  for  purposes  of  this  investigation.  Consequently,  they  were  chosen  in 
preference  to  the  retail  prices.  The  data  for  all  three  indices  annual  for 
the  period  1890-1900,  but  -i-e- monthly  from  this  period  on.  The  Bureau  of  Labor 
has  not  as  yet  carried  their  monthly  computations  past  this  point.  A break  in 
all  three  lines  on  the  chart  is  noticed  in  the  year  1914,  and  a new  series  is 
continued  from  this  year  on.  In  1914  the  Bureau  of  Labor  made  a change  in  their 
method  of  computing  the  index  numbers,  and  consequently  a totally  different  in- 
dex was  obtained  for  the  periods  following  1914.  Therefore,  it  was  not  felt  ad- 
visable to  connect  these  two  periods.  The  indices  extend  through  the  year  1916. 
The  indices  are  recorded  on  the  chart  in  the  original  units  just  as  reported  by 
the  Department  of  Labor.  The  index  of  raw  commodities  is  represented  on  the 
chart  by  a line  composed  of  one  dash  and  one  dot.  The  index  of  manufactured  com- 
modities is  represented  on  the  chart  by  a dotted  line.  The  index  of  all  commo- 
dities is  represented  on  the  chart  by  a line  composed  of  dashes. 

All  three  indices  were  plotted  on  the  same  chart  to  the  usual  scale. 
The  next  group  for  consideration  is  the  "Foreign  Trade  Group". 

Foreign  Trade  Group t- 

This  group  is  composed  of  the  following  indices:  monthly  imports  of 

merchandise  to  the  United  States;  monthly  exports  of  merchandise  from  the  United 
States;  and  average  monthly  rate  of  "demand"  sterling  exchange. 

OUUL . 

Monthly  Imports  of  Merchandise  into  the  United  States:  This  od  at  a 4*  en- 


*A  description  of  these  indices  will  be  found  in  No.  149  of  Bureau  of  Labor  Pub- 
lications. Wholesale  Prices.  The  data  from  1890-1913  was  taken  from  this  publi- 
cation. The  later  data  came  from  the  subsequent  publications.  For  a critical 
examination  of  the  methods  employed,  and  an  evaluation  of  these  indices  see  #173 
of  the  same  series,  dealing  with^flie  Making  and  Using  of  Index  Numbers.  This 
pamphlet  wa3  written  by  Dr.  W.  C.  Mitchell. 


» 


. 

. 


. 


. 


‘ 


* 


. 


■ . . 

' » 


* 


4 

* 


~TZT- 


yiu+j 

\ .u-k 


tirely  monthly  in  character  and  extend^  from  1892-1917.  obtained,  for 

the  period  1892-1902,  from  The  Monthly  Summary  of  Foreign  Commerce  of  the  United 


States,  For  the  period  1903-1917,  Vt-  was  obtained  from  The  Review  of  Economic 

"ttlA <W 

Statistics,  where  had  been  obtained  from  The  Monthly  Summary  of  Foreign  Com- 

merca  of  the  United  States.  Since  it  was  easier  to  obtain  the  figures  from  The 

\m**~ 

Review,  this  source  was  used  in  place  of  the  former.  The  data  been  recorded 

(UK- 

on  the  chart  in  terms  of  ten  million  dollars.  This  data  represented  on  the 
chart  by  a line  composed  of  dots. 

OM- 

Monthly  Exports  of  Merchandise  from  the  United  States:  This<_data  also 

r^y  hrtu. 

entirely  monthly  in  character  and  extend^  from  1892-1918.  ^It  was -obtained  en- 
tirely  from  The  Monthly  Summary  of  Foreign  Commerce  of  the  United  States,  -ft-/ 

UuvC  ^ 

hae- been  recorded  on  the  chart  in  terms  of  ten  million  dollars,  carried  to  two 

A 

Out/— 

decimal  places.  Thdsedata  ie-'repres anted  on  the  chart  by  a line  composed  of 


dashes. 


Average  Monthly  Rate  of  Demand  Sterling  Exchange:-  Thlscdata  has-  been  com- 
piled  by  taking  the  mean  between  the  high  and  low  prices  of  demand  sterling  ex- 
chan@3  for  each  month  as  recorded  in  The  Financial  Review.  The  dat a ^wssr report- 
ed to  four  decimal  places,  but  in  recording  the  data  on  the  chart  the  decimal 
point  was  moved  one  place  to  the  right  to  emphasize  the  fluctuations.  The  data 

(Uk. 

extend^  from  1890-1917.  The  data^drS-  represented  on  the  chart  by  a solid  line. 

All  of  these  three  indices  were  recorded  on  the  same  chart  under  the 
group  heading  as  given.  The  usual  scale  was  used,  as  already  explained.  The 
last  group  considered  is  the  "Stock  Exchange  Trading  Group". 

The  Stock  Exchange  Trading  Ckoup:- 

This  group  is  composed  of  the  following  two  indices:  volume  of  sales 

on  the  New  York  Stock  Exchange,  and  monthly  clearings  on  all  stock  exchanges  in 
the  United  States.  Since  both  indices  indicate  trading  activity  of  the  stock 
exchange  it  was  decided  to  use  one  index  to  represent  trading  in  New  York,  and 


‘ 


• ' 

► 

: 

* 

* 

* 

* 


: .... 

- 


-126- 


the  other  to  represent  trading  all  over  the  country.  The  data  in  both  instances 

<*CX_ 

extend^  from  1890-1917  and  is- monthly  in  character  throughout.  It  was  obtained 
for  both  indices  from  The  Financial  Review,  which  gives  the  data  in  monthly  form. 
The  volume  of  sales  is  reported  in  units  of  hundreds  of  millions  of  shares  sold 

cux. 

per  month,  carried  to  two  decimal  places.  Thistdata  represented  on  the  chart 

A 

by  a solid  line.  The  clearings,  all  exchanges,  -ts~re corded  on  the  chart  in 

a 

terms  of  hundreds  of  billions  of  dollars,  carried  to  two  decimal  places.  It/i-a- 

A 

represented  on  the  chart  by  a dotted  line. 

This  completes  our  examination  of  the  groups  of  economic  factors.  It 
may  be  well  at  this  point  again  to  emphasize  the  construction  of  the  charts,  all 
of  which  are  similarly  drawn  as  to  scale  and  method.  The  horizontal  axis  is 
used  to  indicate  the  element  of  time;  three  inches  representing  one  year.  Verti- 
cal lines  divide  the  charts  into  yearly  sections,  while  both  the  upper  and  lower 
borders  are  divided  into  spaces  one  quarter  of  an  inch  long  to  indicate  the 
months  within  each  year.  The  vertical  axis  is  used  to  indicate  the  quantitative 
elements,  whatever  they  may  be  for  the  particular  index  or  group  of  indices. 
Horizontal  lines  divide  the  charts  into  ten  unit  sections  along  this  axis,  while 
the  borders  on  both  sides  of  the  charts  are  divided  into  spaces  one  quarter  of 
an  inch  long  to  indicate  one  unit  spaces.  Thus  all  the  charts  are  constructed 
to  a symmetrical  scale  for  monthly  data  - one  quarter  of  an  inch  on  the  one  axis 
representing  one  month  of  the  temporal  element,  and  one  quarter  of  an  inch  on 
the  other  axis  representing  one  unit  of  the  quantitative  element.  The  quantita- 
tive element  differs  in  the  various  indices.  Some  were  plotted  on  the  charts  in 
millions  of  dollars;  some  were  plotted  in  tens  of  millions  of  dollars;  some  were 
plotted  in  tons;  and  others  in  bushels.  In  each  instance  the  unit  chosen  was 
that  which  would  bring  out  the  movements  clearly  and  distinctly,  without  undue 
dispersion,  and  yet  keep  the  charts  within  a reasonable  size  for  purposes  of 
comparison.  It  may  well  be  asked  at  this  point:  is  it  possible  to  compare  fac- 


' 


** 


■ 

. 


. 

* o 1 no  Jffijo;, 


* 


- 


* 


. . . 


. 


- 

. 


•,  . 


* 


- 


: 

* 


: 


-Tu- 


tors whose  quantitative  unit  of  measure  differs  so  widely?  Can  we  compare  mil- 
lions of  dollars  with  thousands  of  tons?  The  answer  to  these  questions  will 
largely  depend  on  the  purposes  of  the  comparison.  We  can  compare  these  differ- 
ent units  when  we  are  interested  in  the  possible  relations  existing  between  the 
movements,  the  fluctuations,  of  these  units.  While  we  may  not  be  able  to  com- 
pare quantitatively,  bushels  and  dollars,  we  can  point  out  significant  changes 
in  quantities  so  measured.  That  is  to  say,  it  is  possible  to  call  attention  to 
a probable  causal  sequence  existing  between  bushels  of  wheat  and  the  dollar 
value  of  railroad  stocks,  provided,  of  course,  that  there  is  some  similarity  in 
the  movement  of  these  two  items.  This  fact  is  clearly  recogaized  by  the  process 
of  reducing  to  like  terms,  for  purposes  of  mathematical  comparison,  by  the  meth- 
od of  standard  deviation.  Here  unlike  unit3  are  reduced  to  similar  terms  for 
purposes  of  comparison.  The  comparison  can  then  be  made  with  mathematical  ex- 
actitude. The  units  studied  here  have  not  been  treated  by  the  method  of  stan- 
dard deviation,  because  no  exact  measurement  is  attempted,  and  it  is  desired  to 
study  the  movements  in  the  "raw”  state , Just  as  they  occur.  Some  of  the  quanti- 
ties listed  here  do  not  lend  themselves  to  a refined  treatment. 

So  much  for  the  groups  of  economic  indices.  There  yet  remains  to  be 
considered  the  psychological  factors  affecting  the  general  price  level  of  stocks. 
Of  course,  these  factors  were  not  plotted  graphically,  since  we  have  no  method 
at  the  present  time  of  reducing  these  factors  to  quantitative  units. 

The  Psychological  Factor s:- 

The  psychological  factors  affecting  the  general  level  of  prices  of 

stocks  may  be  roughly  grouped  under  the  following  main  headings:- 

Political  events 
Legislative  enactment 
Judicial  decisions 
Governmental  executive  policy 
Accidents 
New  inventions 


' 


. 

. 


. 


. 

- 

’•j  tits':  w 


. 


: 


-130- 


Discoveries;  mechanical  and  geographical 

Miscellaneous  factors,  such  as  state  of  health  of  important  men, 

revivals  of  religious  feeling,  etc. 

These  events  may  actually  occur,  or  their  influence  may  be  made  felt  by  "rumor " 
or  premonition.  It  is  believed  that  these  factors  have  a direct  effect  on  the 
general  level  of  stock  prices  over  a long  -period  of  time,  say,  a month  or  more. 
They  may  have  an  inmediate  direct  effect  on  the  prices  of  stocks,  provided  the 
technical  position  of  the  market  is  weak.  That  is  to  say,  if  the  market  is  "top 
heavy";  with  the  market  prioes  in  excess  of  the  "intrinsic  value"  of  the  shares. 
If  the  technical  position  of  the  market  is  sound,  these  events  may  have  but  lit- 
tle direct  effect  upon  the  prices  in  themselves. 

Now  in  the  long  run,  these  factors  may  have  an  effect  upon  the  general 
price  level  of  stocks  directly.  That  is  to  say,  they  may  affect  the  industrial 
situation  in  general,  which  thus  affects  business  enterprise,  and  these  changes 
are  then  reflected  in  the  prices  of  shares  in  business  enterprise,  stocks. 

The  psychological  factors  have  been  gathered,  in  this  study,  from  The 
Financial  Beview.  The  Financial  Review  is  an  annual  publication  and  each  issue 
contains  a "retrospect"  of  the  past  year  by  months.  It  is  from  this  "retrospect 
by  months"  that  the  psychological  factors  have  been  obtained.  The  events  of 
greatest  importance  for  the  problem  were  gathered  from  this  source  and  recorded 
on  small  cards,  one  month  to  each  card.  As  the  various  economic  factors  are 
studied  periodically  with  the  index  number  of  stock  prices,  reference  will  be 

had- to  the  important  psychological  factors  exercising  their  influence  at  the 

A 

time.  Any  probably  or  warranted  conclusions  will  be  set  down  for  what  they  are 
worth.  In  the  concluding  chapter  results  of  the  inquiry  will  be  summarized* 


. 


, - ..  , ... 


. : : ' • i . ' 


X«  tfpX  t • ' 


....  . . 1 


• 

. 

■ . * 

. • ■ 

. 


t:  .1  ' ' . ' 

► • - 


-131- 


BIBLI0GRAP5Y 


Business  Cycles,  Panics,  Crises,  Depressions,  Etc 132 

Sources  of  the  Data  used  in  this  Study 153 

Economic  and  Financial  History  of  the  Period  1890-1918  154 

Scientific  and  Statistical  Method;  The  Problem  of  Causality 155 

Investment,  Speculation,  Trading  in  Stocks, 

Fluctuations  in  the  Prices  of  Stocks 160 


-132- 


BUSINESS  CYCLES,  PANICS,  CRISES,  DEPRESSIONS , ETC. 


Adams,  Charles  F. 

Aftalion,  Albert 
Adler,  Georg. 
Aldis , W.  S. 
Allard 

Aider son,  Adam 


Massachusetts , its  Historians  and  its  History; 
an  Object  Lesson. 

Boston  and  Hew  York,  1893. 

Les  Crises  Periodiques  de  Surpro duct ion 
M.  Riviere  et  Cie.,  Paris  1913 

Rodbertus,  eine  socialokomomische  Studie. 
Leipzig,  1884. 

Over-pro  due  tion. 

The  Contemporary  Review,  London,  1879. 

La  Crise,  La  Baisse  des  Prix,  La  Monnaie . 
Bruxelles,  1885. 

Historical  and  Chronological  Deduction  of  the 
Origin  of  Commerce  from  the  Earliest  Accounts. 
London. 


Anonymous 


Anonymous 


Anonymous 


Anonymous 


Anonymous. 


A Brief  Popular  Account  of  all  the  Financial 
Panics  and  Commercial  Revulsions  in  the  United 
States;  1690-1857. 

Hew  York,  1857. 

Die  Sttfrungen  im  Deutschen  Wirtschaftsleben  der 
Jahre  1900. 

Leipzig,  1903. 

Market  Fluctuations. 

London,  1876. 

The  Profit  of  Panics;  showing  how  Financial  Storms 
arise,  who  make  Money  by  them  ....  and  Other 
Revelations  by  a City  Man. 

London,  1866. 

Rationale  of  Market  Fluctuations. 

London,  1875. 


American  Academy  of  Politi-  Annals,  Vol.  31  #2. 

cal  and  Social  Science  Lessons  of  the  Financial  Panic,  1908. 

(A  group  of  articles  dealing  with  the  lessons 
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Attwood,  Thomas 


Prosperity  Restored. 
London,  1817. 


Bagehot,  Walter 


Lombard  Street;  A Description  of  the  Money  Market. 
Hartford,  Conn.,  1891. 


-133- 


Bahr , Hermann 
Bailey,  Samuel 

Bain,  Alex. 


Rodbertu3'  Theorie  der  Absatzkrise. 

Wien,  1884. 

The  Metallic  Currency;  the  Cause  of  the  Present 
Crisis  in  England  and  America. 

London,  1837. 

The  Boot  ions  and  the  Will. 

London,  1875. 


Baring,  Alex. 
Baxter,  Robert 

Beaumont,  Henri  de 
Bebel 


The  Financial  and  Commercial  Crises  Considered. 
London,  1847. 

The  Panic  of  1866  with  its  lessons  on  the  Currency 

Act. 

Longman’s  Green  & Company,  London,  1866. 

Des  Fetes  comme  Remede  a la  crise  Coxnnerciale  in 
Journal  des  Economistes. 

Die  Frau  und  der  Socialismus. 

Stuttgart,  1890. 


Bellet,  Daniel 
Bellet , Daniel 

Benner,  Samuel 

Benton,  T.  H, 
Bergnann,  E.  von 
Berliner,  Adolf 

Eemhardi,  Th. 

Beveridge,  W.  H. 


Crises  Economiques,  Crises  Conmerciales,  Crises 
de  Guerre. 

F.  Alcan,  Paris,  1918. 

Les  Crises  Generales,  Commercials s , et  Economiques. 
Revue  des  Sci.  Politiques 
Vol.  32,  pp  83-109,  239-249. 

Paris,  1914. 

Benner’s  Prophecies  of  Future  Ups  and  Downs  in 
Prices. 

Cincinnati,  1884. 

Thirty  Years'  View. 

New  York,  1854. 

Geschichte  der  Nationalokonomischen  Krisentheoren. 
Stuttgart,  1695. 

Die  wirthschaftliche  Krisis,  ihre  Ursachen  und 
ihre  Entwi  eke  lung. 

Hannover,  1878. 

Versuch  einer  Kritik  der  Grunde,  die  fur  gross  und 
klein  Grunde  i gen  turn  angefuhrt  werden. 

St.  Petersburg,  1849. 

Unemployment;  A Problem  of  Industry. 

Longmans,  Green  & Company,  N ew  York. 


. 

» 


. 


Bilgram,  Hugo 

Bilgram,  Hugo  and  Levy, 

Block,  Maurice 
Boccardo,  Gerolamo 
Boccardo,  Gerolamo 

Bonnet,  Victor 
Bonnet,  Victor 
Eort,  L.  Muret  de 

Bouniatian,  Mentor 

Bourne,  H.  E.  F. 
Bouniatian,  M. 

Bowen,  Francis 
B rent ano , Ludwig  Jos. 
Brentano , Ludwig  Jos. 


-134- 


Involuntary  Idelness.  An  Exposition  of  the  Causes 
of  the  Biscrepancy  existing  between  the  Supply  of 
and  the  Demand  for  Labor  and  its  Producte. 
Philadelphia,  1889. 

Louis  The  Cause  of  Business  Depressions. 

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